Editor's note: The Japanese Liberal Democratic Party (LDP) expressed its intention last Friday to convene an extraordinary Diet session as early as October 20 to conduct a Prime Ministerial election. Sanae Takaichi, who was elected as the LDP president, is seen as a strong candidate to win this election, and if elected, she would become Japan's first female Prime Minister in history. However, on October 10, the Komeito Party announced that it would withdraw from the ruling coalition with the LDP, introducing more variables into Takaichi's bid for the premiership.
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The Japanese Liberal Democratic Party (LDP) conveyed last Friday its intention to convene an extraordinary Diet session as early as October 20 to hold a prime ministerial election. Earlier, Sanae Takaichi, who was elected as the LDP president, is considered highly likely to win the election and become Japan's first female prime minister in history. This series of changes will have profound impacts on Japan's economy, diplomacy, and other areas. To discuss these issues, we have invited Cai Tongjuan, Director of the Macroeconomic Research Department and Researcher at the Chongyang Institute for Financial Studies at Renmin University of China, and Qin Tai, Deputy Director and Chief Macro Analyst at Research Institute of Huafu Securities. Hello everyone!
Takaichi has been most notably labeled in Japanese politics as a staunch supporter of "Abenomics." For this reason, following her election as LDP president, the market has begun to bet that the Japanese government will implement large-scale fiscal stimulus measures and maintain an expansionary monetary policy. The Nikkei 225 index subsequently rallied. So, Ms. Cai, what is your view on the current market reaction? If Takaichi truly becomes the Prime Minister of Japan, what further impacts might there be on the market?
The positive reaction from the market to Takaichi's election as LDP president mainly reflects investors' expectations of her continuation of Abenomics. Takaichi has long advocated for dual policy mix of expansionary monetary policy and proactive fiscal measures, which suggests that under her leadership, the Bank of Japan may continue to maintain low interest rates or slow the pace of tightening to support the economy and the competitiveness of export-oriented enterprises. The rise of the Nikkei 225 is indicative of the market's pricing in a sustained accommodative liquidity environment, improved corporate profits, and possibly weak yen. If Takaichi is truly elected as Prime Minister, in the short term, the Japanese stock market and risk assets may further benefit, especially in the export, manufacturing, and financial sectors. However, in the medium-to-long term, continued easing may lead to rising fiscal deficits and inflationary pressures. If the market begins to worry about the sustainability of these policies, bond market volatility and currency depreciation risks could rise. Overall, the market appears optimistic in the short term, but long-term concerns remain.
Okay. Mr. Qin, what do you think? How do you expect the market to fluctuate in the near future?
Sanae Takaichi's election as the new president of the LDP makes her highly likely to become Japan's next Prime Minister. Her governing approach likely points towards the reactivation of monetary easing and large-scale fiscal expansion, which may lead to a significant depreciation of the yen. On October 4, Takaichi was elected as the new president of the ruling LDP, making her a strong candidate for the next Prime Minister. Takaichi's economic policy stance leans more towards simultaneous monetary easing and large-scale fiscal expansion. As a result, the overall Japanese stock market has risen, but we also see that in the foreign exchange market, the USD/JPY pair briefly breached the 153 level, marking the lowest level for the yen in recent months. After her election, Takaichi expressed a desire to increase subsidies to local governments and mentioned not ruling out lowering the consumption tax as measures to quickly respond to inflation. This has already conveyed an initial inclination towards fiscal expansion. For Japan, an economy with a long-term high level of government debt, further fiscal expansion may mean that monetary policy may need to maintain an accommodative stance.
Yes. In its latest market commentary, T.Rowe Price noted that
although Japanese stocks have rebounded strongly since April, the outlook remains positive. The policy environment is expected to continue supporting the market, which is full of opportunities, especially in industries benefiting from expanded fiscal stimulus and investment. Takaichi's election also signifies the continuation of corporate governance reforms initiated during the Abe era, which have helped improve corporate transparency and shareholder returns.
However, the current Japanese economy is facing severe challenges from high inflation. Some opinions suggest that, against this backdrop, the "Abenomics" advocated by Takaichi seems somewhat out of place. Pushing for "Abenomics" under these circumstances could lead to a collapse of the yen. Given such a complex reality, will Takaichi adjust her economic policy direction after her election? Ms. Cai?
In the context of Japan's high inflation and the ongoing pressure on the yen, if Takaichi is elected, she will likely still use Abenomics as her core ideology. However, the actual implementation of her governance may trend towards moderation and pragmatism. Politically, she needs to continue Abe's path to solidify support from conservatives, but economically, if she maintains large-scale easing, it could further weaken the yen, increase import costs, and exacerbate price pressures, which contradicts current public sentiment. Therefore, she may adopt a strategy that is labeled as easing but is, in fact, a subtle adjustment—maintaining a low-interest-rate stance to stabilize the financial market while moderately aligning with the Bank of Japan's gradual normalization of policy. Through fiscal policy, she may focus on supporting energy, self-innovation, and supply chain security rather than simply stimulating demand. In other words, her policy framework may still be cloaked in the guise of Abenomics, but its core will emphasize structural adjustments and exchange rate stabilization to balance political continuity with the constraints of economic reality.
Alright. Mr. Qin, what is your view on the economic policy tendencies following Takaichi's election?
The probability of the Bank of Japan raising interest rates in October has significantly decreased. Japanese inflation is closely related to the yen's exchange rate, with the service CPI, primarily driven by wages, lagging the exchange rate by about 12 months and currently at a relatively high level. The commodity CPI responds more rapidly, lagging by only about a month. The continuous decline in commodity inflation, combined with the peak and subsequent dropin service price inflation, which lags behind, constitutes the core logic for the gradual decline of Japan's core CPI after reaching its peak. This year, we have also observed a continuous cooling in domestic retail growth, with weak domestic demand, compounded by the potential impact of U.S. tariffs on Japanese exports. As a result, the economic outlook for Japan likely does not support a rebounding inflation scenario. Takaichi mentioned in her first press conference after being elected LDP president that she would quickly take measures to address inflation, including increasing subsidies to local governments and not ruling out lowering the consumption tax as an option, which has already conveyed an initial inclination towards fiscal expansion. The Japanese government had long implemented relatively expansionary fiscal policies from the 1960s to the 1980s, resulting in a government debt-to-GDP ratio significantly higher than that of other major economies. This has created a narrow space for the government to unilaterally implement fiscal expansion. A more feasible approach would undoubtedly be for monetary policy to shift towards accommodative easing in response. Therefore, the market has begun to significantly reduce expectations for a 25basis-point rate hike by the Bank of Japan in October, and whether the Bank will continue to consider further tightening operations based on relatively high inflation levels in the future has become an unknown.
Yes. Additionally, there are reports indicating that she will meet with Chinese President Xi Jinping during the APEC meeting at the end of the month. From an international relations perspective, Takaichi is a right-wing conservative figure. How should we assess the development of China-Japan relations following her election, and will it have any impact on the Chinese economy?
As a typical right-wing conservative in Japanese politics, Takaichi's political stance is relatively tough on issues of history, Taiwan, and defense, which theoretically does not favor the improvement of China-Japan relations. However, if she successfully becomes Prime Minister, practical political and economic considerations may prompt her to adopt a more pragmatic foreign policy. Japan's economic dependence on the Chinese market remains relatively high; the manufacturing supply chain, tourist consumption, and export demand are all tied to China. Therefore, Takaichi's desire to meet with President Xi during APEC is a symbolic gesture aimed at easing tensions, stabilizing the economic environment, and avoiding an escalation of confrontation that could harm Japan's domestic economy. She is likely to maintain a tough stance on security and values, while seeking pragmatic cooperation in economic and trade matters. Overall, China-Japan relations may present a pattern of political coldness but economic warmth in the short term. The impact on the Chinese economy is likely to be limited, and there may even be some positive expectations in terms of investment and trade, although strategic trust betweenthe two nations is unlikely to improve materially.
Additionally, Japanese media reports indicate that Takaichi's camp is coordinating a visit from Trump, scheduled for the 28th of this month. If Takaichi becomes Prime Minister, where will Japan-U.S. relations head, Ms. Cai?
If Takaichi quickly pushes for a meeting with Trump after her election, it will be seen as a strong symbol of reinforcing the Japan-U.S. alliance and solidifying her conservative foreign policy. Takaichi shares strong resonance with Trump on values and security, and both sides may align on policies regarding China, defense cooperation, and supply chain risk mitigation. This could lead to closer Japan-U.S. relations but may also exacerbate strategic tensions among China, Japan, and the U.S. From an economic perspective, if Takaichi leverages this to promote Japan-U.S. cooperation in technology and energy, it could help Japan attract investment in advanced manufacturing and semiconductors to support economic growth. However, overly politicized economic security policies could also lead to a more fragmented regional industrial chain, increasing uncertainty for Japanese companies operating in China, resulting in a scenario where short-term political gains coexist with long-term structural risks.
Yes. We also note that the Komeito Party in Japan will exit the ruling coalition with the LDP. Does this mean that there are still variables in Takaichi's election?
The greatest uncertainty surrounding Takaichi's election comes from the former ruling ally, the Komeito Party, officially exiting the ruling coalition and stating it will not support her in the prime ministerial election. This has resulted in the LDP not holding a majority in the Diet, while the largest opposition party, the Constitutional Democratic Party, is actively coordinating with other opposition parties to jointly propose a candidate for Prime Minister to block Takaichi. Even if Takaichi ultimately wins, in a Diet where the opposition holds more power, every important bill she proposes will face difficult negotiations, making her political foundation fragile. Thus, even if she can take office, she must immediately address three major challenges. First, she must build a political alliance and urgently seek new political partners to pass legislation in the Diet. Second, she faces a political crisis and needs to address unresolved scandals involving political corruption to regain public trust and expedite economic policies, including tax cuts, to alleviate public pressure. The third is the diplomatic challenge, where she needs to prepare for a series of important international meetings and deal with sensitive issues with neighboring countries in a very short timeframe.
【Anchor】OK, thank you to both guests. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
Related News:
DDN Business Insider | 'Golden Week' fuels HK's market revival as stocks hit 4-year peak
DDN Business Insider | Amidst focus on the AI market, how can Mainland and HK break through?
Comment