Global Macro Research
Global Macro ResearchJapan gains a new “Iron Lady” Prime Minister
Japan’s political landscape shifts as Sanae Takaichi defies expectations to become the nation’s first female Prime Minister. But is the market’s euphoric ‘Takaichi trade’ running ahead of reality?
Author
Sree Kochugovindan
Senior Research Economist
Duration: 5 Mins
Date: Oct 06, 2025
Markets surged on the surprise rise of Japan’s new "Iron Lady" – but investors may need to recalibrate. Behind the headlines, we believe Prime Minister-elect Sanae Takaichi’s policy mix may reveal more caution than conviction.
A staunch conservative and protégé of late PM Shinzo Abe, Ms. Sanae Takaichi will become Japan’s first female prime minister. As a result, markets have moved to price in Takaichi’s policies of fiscal stimulus, industrial policy, and a dovish monetary policy view.
But, with the campaign-trial softening in the policy details, and the constraints of LDP divisions, minority government, and the bond market, mean we do not expect policy changes from the Takaichi administration on the scale of Abenomics.
Takaichi’s policy: Evolving toward a softer stance
Takaichi is known for her strong support for Abenomics-era stimulus, and scepticism over premature interest rate hikes. Earlier this year she advocated for the controversial consumption tax cut for food products from 10% to 0%, and stated Bank of Japan (BoJ) rate hikes would be “stupid”.
However, Takaichi tempered her fiscal stance during the leadership campaign and is likely to be wary of Japan’s debt burden and the fragility of the Japanese government bond (JGB) market. The details of Takaichi’s election campaign reveal a softer stance on monetary and fiscal easing than the headlines might suggest:
Détente with the BoJ
- Takaichi stated that monetary policy operation should be decided by the BoJ and should be consistent with government economic policy. This is in line with the existing BoJ Act.
- We will pay close attention to future comments and politicization risks. However, the BoJ have historically been quite firm in ignoring political pressure and focusing on data developments.
- The BoJ will also be mindful that the Japanese government bond (JGB) market remains illiquid and highly sensitive to any doubts over central bank independence. The central bank has the tools to manage bond market dislocation.
- We maintain the view that the BoJ will wait until January to raise rates (Chart 1). Any delay in this timing will be a result of insufficient evidence of inflation meeting bank forecasts and not because of political duress.
Chart 1. Market pricing for 2026 …. shift or overshoot?
Tackling the cost of living crisis
- The consumption tax cut was removed from Takaichi’s campaign, respecting the broader party line. It is a major revenue source for the government and a key signal for bond investors looking for risks of fiscal irresponsibility.
Instead, Takaichi proposes targeted fiscal measures to reduce the impact of inflation, including:
- Cash transfers and tax credits for households, reduction of diesel fuel delivery tax, ending the gasoline tax, and grants for local governments to use at their discretion.
- Support for families facing severe living difficulties combined with an increase in medical and nursing care fees to raise incomes of medical workers and support staff.
- Plans to formulate a system of tax breaks with cash handouts to reduce the burden of low-middle income households.
Industrial policy
- Takaichi wants to promote investment in artificial intelligence (AI), chips, quantum computing, and strengthen cyber defense.
- Takaichi’s energy policy advocates next-generation nuclear reactors and new nuclear fusion for cheap and stable energy supply. Domestic production of solar panels instead of imports.
- Increase defense spending to at least 2% of GDP over the next five years.
Funding policy
- In the past, Takaichi has been willing to raise bond issuance to fund cost of living measures and industrial policy. But in recent speeches she has proposed funding via available government funds and an expected upswing in tax revenues.
- She acknowledges the need for fiscal consolidation, but it is not the main goal – raising consumer sentiment and economic growth is the priority.
- The policies outlined, even with household cash handouts in the next supplementary budget, are not expected to raise the debt burden. Interest payments remain low, and tax revenues have steadily increased.
- It seems unlikely Takaichi will immediately adopt large-scale fiscal expansion, but this could creep in over time.
We believe that internal LDP divisions as well as the challenge of a minority government should curtail extensive fiscal easing. The coalition will continue to coordinate policy with opposition parties on a policy-by-policy basis.
Recent episodes of bond volatility should prevent the party from simply reverting to the easy fiscal policy of Abenomics (Chart 2).
Chart 2. Bond market liquidity measures show the heightened level of sensitivity to fiscal headlines
It will be important to watch how Takaichi responds to pressure from opposition parties who support more aggressive tax cuts.
Countering the rise of populist fringe parties
There is a constant risk of a coalition realignment extending beyond the current two-party coalition.
Since the late Shinzo Abe stepped down as prime minister in September 2020, the LDP entered a period of political churn with now four prime ministers in the space of just five years.
With a minority government in both the upper and lower house, the ruling LDP-Komeito coalition struggled through policy stasis, needing to partner with opposition parties on a policy-by-policy basis.
Across the opposition, fringe parties have gained momentum in the polls. Frustration over inflation dominated the political narrative since the pandemic.
Shinjiro Koizumi was considered the front runner as he led the polls among Diet members. Meanwhile Takaichi was favoured by local party members.
As Diet member votes hold a higher weight in the second-round, polls in the run up to the vote implied a Koizumi win. However, the vote composition (Table 1) reveals that Takaichi narrowly won the Diet member votes as well as rank and file during the run-off.
Table 1. Diet member vote split reveals a cautious shift to the right to regain populist voters
The LDP has become quite fragmented over the past five years, with no single faction able to dominate. But Takaichi’s surprise win among Diet members signals a shift toward a more conservative and nationalistic stance.
The vote split signals a cautious desire to win back younger voters and counter the rise of populist fringe parties, but little appetite for a major policy overhaul.
Geopolitical hawk
Takaichi’s brand of staunch nationalism will likely increase tensions with both China and South Korea.
Critical of Chinese economic practices, claiming intellectual property theft, she favours reducing Japan’s economic dependence on China. She visited Taiwan earlier this year and has endorsed a pro-Taiwan stance with deeper cooperation on defence and security.
There is a strong chance that the PM will visit the Yasukuni shrine for the war dead. This will anger both Beijing and Seoul. Japan-Korea relations had improved in recent years.
While Takaichi supports a US-Japan alliance, she also favors reopening elements of the US investment agreement that are deemed as not aligned to Japanese interests. Pushing forward with this would risk retaliatory tariffs from the US.
Market’s need to decipher the overall policy mix
Overall, we do not expect major policy changes from the Takaichi administration. The combination of internal LDP divisions and a minority government will limit the scale of fiscal spending.
Nevertheless, the bond market will likely remain sensitive to Takaichi’s communication. Any signal of conceding to more expansionary fringe party demands will lead to bouts of bond volatility and yield spikes.
Planned fiscal spending on strategic investments should be supportive for equity markets.
The relationship with President Trump will be closely watched. Takaichi’s stance on the investment element of the US trade deal risks delaying progress on current negotiations.
Key dates to watch
The next quarter will be critical for investors to understand Takaichi’s policy path:
Mid-October: Extraordinary Diet session begins, PM appointment, new cabinet formed, supplementary budget discussions begin.
October 28–29: US President visits Japan
October 29–30: BoJ Monetary Policy meeting with Outlook Report
December: FY2026 Tax Reform Plan
December 18–19: BoJ monetary policy meeting
Late December: FY2026 Budget proposals for Cabinet approval
Important information
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