Japan Isn’t the U.S. Its New Party Leader Won’t Wield an Economic Sledge Hammer.

Sanae Takaichi, the newly elected leader of Japan’s ruling party, the Liberal Democratic Party. (Yuichi Yamazaki / AFP / Getty Images)

Key Points

• Sanae Takaichi’s election as LDP leader led to a 4% jump in the iShares MSCI Japan ETF and a more than 2% fall in the yen.
• Japan’s government debt exceeds 200% of GDP, limiting fiscal easing despite likely increased spending under Takaichi.
• The Bank of Japan raised rates from negative to 0.5% and is expected to implement two more hikes next year.

Take a breath, markets. Japan is still gradualist, consensus-seeking Japan.

Sanae Takaichi doesn’t look much like President Donald Trump. But investors reacted to her surprise Oct. 4 election as Liberal Democratic Party leader as if a Japanese prime minister-to-be had the same latitude as a U.S. president controlling both houses of Congress to push a pro-growth agenda of tax cuts and lower interest rates.

The iShares MSCI Japan exchange-traded fund jumped 4% in two sessions on expectations of fiscal stimulus. The yen fell more than 2% against the dollar in a bet on looser monetary policy. This even as Takaichi was walking back some of her more provocative campaign rhetoric, like calling further rate hikes by the Bank of Japan “stupid.”

“Her postelection remarks suggest a measured approach and potential recalibration based on pragmatic considerations,” says Yuko Nakano, associate director of the U.S.-Japan strategic leadership program at the Center for Strategic and International Studies. In other words, Japan is still Japan.

The challenges facing the No. 4 economy’s first female leader look more suited to a tightrope walker than a wrecking ball. Economically, she has to ease the pain of inflation, which helped cost the perennially governing LDP its parliamentary majorities in two straight elections, without igniting more inflation.

Politically, she needs to unite the LDP’s myriad and shifting internal factions and add votes from a fractured opposition to get legislation passed. Internationally, she needs to keep Trump friendly while finessing his outlandish demand for $550 billion from Japan that he would personally invest in the U.S. economy.

The idea that Takaichi’s ascent heralds a return to “Abenomics,” the ultraloose fiscal and monetary policies pushed by long-serving predecessor Shinzo Abe, looks simplistic against the current complexities, says Shigeto Nagai, head of Japan economics at Oxford Economics. “Many of the Abe faction have lost their parliamentary seats,” he notes. “Most understand that the original Abenomics wouldn’t work anymore.”

Some fiscal easing looks all but certain once the 64-year-old Takaichi assumes the premiership over the next few weeks. But government debt that already exceeds 200% of gross domestic product, and the risk of spooking bond markets into making debt servicing more expensive, will limit the shift. Takaichi will stop short of cutting Japan’s 8% consumption tax, as some opposition parties demand, instead opting for “one off” support payments to low-income households and small businesses, Nakano predicts.

“We have a high conviction that they will spend more, but not enough to frighten off investors,” echoes Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. The yield on Japan’s 30-year bonds, traders’ most closely watched metric, crept up 12 basis points to 3.28% after Takaichi’s election as LDP leader.

Neil Newman, head of strategy at Tokyo-based Astris Advisory, is counting on a more muscular industrial strategy under Takaichi: state-backed or encouraged investment in strategic high-tech and military industries. “I’m seeing momentum in defense, AI, semiconductors, nuclear energy,” he says.

Stocks that could benefit on the tech side include IT conglomerate NEC and Tokyo Electron, which makes semiconductor manufacturing equipment. Leading names in defense are Mitsubishi Heavy Industries and Kawasaki Heavy Industries.

Takaichi’s leverage over Japan’s central bank will likely be more limited. The BoJ has ushered in a new era by raising rates from negative to 0.5% over the past 18 months. Hurd expects two more hikes next year as inflation sticks above the bank’s 2% target. “If fiscal spending embeds inflation, that just strengthens the case for more BoJ tightening,” he says.

The U.S. Federal Reserve will likely be cutting rates in 2026, narrowing the return differential with Japan and bolstering the yen, Hurd predicts. He is targeting 135 yen to the dollar, a value last seen in early 2023, by the end of next year. The current exchange rate is 151.

To Newman, the systemic checks on Takaichi, even after her historic victory, are good news. “It’s a weak government that can’t do much to derail the momentum we have,” he says.

Japanese stocks have gained 40% over the past two years despite Takaichi being the third prime minister over that time. The drivers have been corporate governance improvements and a rise in animal spirits after decades of deflation. “You’re seeing a more dynamic labor market, and business owners attending seminars to learn how to raise prices,” Hurd comments.

Takaichi’s political trick will be addressing discontent around those paradigm shifts without derailing them. That and placating Trump. Good luck.

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