The Japanese yen plunged and Japanese stocks hit a record high. Markets read the move as the resurgence of the so-called "Takaichi trade," a bet premised on rising stock prices and a weaker yen, after Prime Minister Sanae Takaichi raised the possibility of an early general election next month. Expectations spread that the prime minister's favored stance of loose fiscal policy and low interest rates would return, spurring stock buying while weighing on the yen and Government Bonds markets.
On the 13th (local time), the Nikkei 225 rose 3.1%, setting a record high again, according to the Financial Times (FT) of the U.K. The yen, by contrast, weakened to the 159-per-dollar range, its lowest since July 2024. That level was close to the exchange rate at which Japanese authorities previously intervened in the foreign-exchange market. The yen's weakness continued into European trading hours, with transactions around 159.06 per dollar.
Markets pointed to the possibility of an early general election as the backdrop for the move. According to Japanese media, a senior official of the ruling Liberal Democratic Party said, "Prime Minister Takaichi suggested within the party that an early general election could be held after dissolving the parliament on the 23rd." With the prime minister's approval rating above 70% at present, observers said the calculation is that holding an election now could boost the ruling party's seats, currently short of half, to a majority.
Markets reacted immediately to the possibility of an early election. In Tokyo's securities circles, domestic and overseas investors bought at the same time and led the advance. Experts said expectations that Prime Minister Takaichi's growth-friendly policy bent would bring continued large-scale fiscal expenditure and an accommodative monetary environment were reflected in the stock market.
In fact, the Takaichi trade showed clearly across stocks, bonds, and foreign exchange. Buying concentrated in tech, defense, and commodities-related shares, and the Topix index also closed up 2.4%.
By contrast, selling continued in the Government Bonds market. The yield on Japan's 20-year Government Bonds topped 3.14%, hitting a record high, and the 10-year Government Bonds yield rose to 2.16%, the highest since 1999.
Bond investors said the possibility of an early election threw a wrench into the existing policy timetable. April Larousse, head of investment strategy at investment firm Insight Investment, said, "Markets had expected the government to focus on passing the budget, and they were surprised by changes in the political schedule," adding, "The order of policy execution looks somewhat unusual."
The weak yen is also creating political burdens. The yen's decline feeds directly into higher food and energy prices, turning into a sensitive issue in Japan. In a society long accustomed to deflation and low prices, perceived inflation is becoming a source of political pressure.
Even though the Bank of Japan raised the benchmark interest rate in December last year to 0.75%, the highest in 30 years, the yen's weakness did not subside. Markets are pricing in the possibility that the Bank of Japan will raise rates again this year, but political factors and expectations for fiscal expansion are seen offsetting that.
Meanwhile, the possibility of intervention in the foreign-exchange market resurfaced. In 2024, when the yen hovered around 160 per dollar, Japan intervened in the market four times. Recently, Japan's Finance Minister Satsuki Katayama said after talks with U.S. Treasury Secretary Scott Bessent that they "shared concerns about the one-sided continuation of yen weakness." Katayama stressed having full authority to intervene in the foreign-exchange market if necessary.
Some investors, however, worry that Prime Minister Takaichi's fiscal policies could lead to higher long-term borrowing costs. Japan's government debt has already exceeded 200% of gross domestic product (GDP). Kit Juckes, chief FX strategist at investment bank Societe Generale, said, "Markets are starting to grow more wary about the sustainability of Japan's debt."