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[MARKET ANALYSIS] The "Takaichi trade" resumes amid reports of an early Japanese election

The resumption of the 'Takaichi trade' suggests that markets are responding to speculation of an early election in Japan, likely boosting the Nikkei while putting downward pressure on the JPY.

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[MARKET ANALYSIS] The "Takaichi trade" resumes amid reports of an early Japanese election

[MARKET UPDATE] USD/JPY eclipses 159.00 to a 159.04 peak as the "Takaichi trade" extends. Potential intervention in focus; reminder, US CPI at 13:30GMT.

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  • APAC hours saw a resumption of the “Takaichi trade” as the Nikkei 225 hit an ATH high at 53.99k while the JPY slumped to an almost two-year low as USD/JPY got to 159.03 and firmly into the intervention zone.
  • Spurred by speculation that PM Takaichi would call an early election. Speculation around this has been growing in recent sessions, given the PM’s and LDP’s approval ratings, and then saw an extension overnight after Kyodo reported that Takaichi will be dissolving the Lower House on the 23rd of January.
  • If the election does occur as reported, then the “Takaichi trade” may extend further, particularly if the result is a single-party majority for the LDP, as Takaichi would be free to move ahead with her fiscally expansive policy goals.
  • Daiwa’s Kinouchi wrote, before this week’s events, that a January dissolution of the Lower House could see the Nikkei 225 get to 68k in Q3.
  • For the JPY and JGBs, the bias would be to further selling. As more expansionary policy opens the door to a tighter BoJ and increased issuance, with the yield curve bias potentially a steeper one if the long-end comes back into the forefront of focus. For the JPY, MUFG wrote that a break above last year’s 158.87 peak (surpassed overnight) brings 160.00 into focus and then the July 2024 high of 161.95. JGBs have been as low as 131.81, the 10yr yield to 2.17% and the 30yr back above 3.50%.
  • Intervention could, potentially, offset some of the JPY weakness. Overnight, we saw Finance Minister Katayama remarks that US Treasury Secretary Bessent shares the concern around a weak JPY; commentary signalling that intervention, possibly coordinated, could be on the horizon. More recently, the Keidanren Chair said currency depreciation has gone too far and a shift towards JPY appreciation is now required.
  • For the BoJ, the LDP governing as a single-party majority presents greater upward price and wage risks. Furthermore, the JPY depreciation that we have/could see would add to the price pressures faced domestically. Factors that would act in favour of tighter policy by the BoJ and serve to explain much of the JGB move. On this topic, Goldman Sachs believes that the BoJ will shift to a semiannual pace of tightening vs the current annual pace, and move towards 1.5% (currently 0.75%), citing Takaichi’s administration as a contributing factor; alongside, proximity to the 2% inflation goal and aggressive corporate price setting activity.
  • Market pricing currently implies a 25bps hike in September (+26bps implied), with around 13bps of additional tightening implied by end-2026, pricing that has tilted marginally more hawkish over the last week.
Context

If Prime Minister Takaichi successfully consolidates power, her potential fiscal policies may align with tighter monetary measures from the BoJ, signaling a significant shift in Japan's economic landscape that could have broad implications for global markets.

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