"Japan's Next Prime Minister: 'Expanded Fiscal Policy' Inevitable, What Are the Impacts on Financial Markets?"

As the Liberal Democratic Party (LDP) prepares to hold its leadership election to determine the successor to Japanese Prime Minister Shigeru Ishiba in early October, a domestic securities firm has assessed that "expanded fiscal policy" will be inevitable regardless of who is elected. In particular, if Sanae Takaichi, former Minister of Economic Security-who favors aggressive fiscal and monetary easing policies-emerges as the leading candidate, there are expectations that the Japanese yen may weaken in the short term, long-term government bond yields may rise, and stock prices may strengthen.

On the 7th, Japanese Prime Minister Shigeru Ishiba announced his intention to resign. Photo by Yonhap News

On September 11, Park Sungwoo, a researcher at DB Securities, stated in his report "LDP Leadership Race Begins: Assessing the Impact on Financial Markets," "Given the current parliamentary structure, it is highly likely that fiscal spending will be expansionary no matter which candidate becomes the LDP leader." In Japan’s parliamentary system, the leader of the majority party becomes the prime minister. Although the LDP does not hold an outright majority, it remains the largest party in the Diet, making it likely that the new LDP leader will become the next prime minister through coalition negotiations.

Researcher Park analyzed the current race as a two-way contest between Shinjiro Koizumi, Minister of Agriculture, Forestry and Fisheries (44), and Sanae Takaichi, former Minister of Economic Security (64). He particularly noted that if Takaichi wins, she would become the first female LDP leader, and described her as belonging to the conservative nationalist faction led by former Prime Minister Shinzo Abe, favoring aggressive fiscal and monetary easing policies (dovish stance). He assessed her as the candidate most likely to bring about a significant shift in policy direction.

He added, "If the likelihood of Takaichi’s victory increases, financial markets may reflect the narrative of Abenomics 2.0, with further fiscal and monetary stimulus by the Japanese government." He predicted, "The so-called 'Takaichi trade'-characterized by yen weakness, rising long-term government bond yields, and a strong stock market-could emerge in the short term in the Japanese market."

In contrast, Koizumi, who is aiming to become the youngest prime minister, is considered a pragmatist who has not publicly expressed a clear preference for fiscal or monetary policy. According to Polymaker, as of the previous day, Koizumi led the prime ministerial betting odds at 56%, ahead of Takaichi’s 30%. However, in a recent Nikkei Shimbun poll on preferred candidates for the next prime minister, Takaichi was slightly ahead at 23%, compared to Koizumi’s 22%, within the margin of error. Other expected contenders include Chief Cabinet Secretary Yoshimasa Hayashi (64) and former Secretary-General Toshimitsu Motegi (69).

Sanae Takaichi, former Minister of Economic Security and a leading candidate for the next Liberal Democratic Party presidency, is responding to questions from reporters after visiting Yasukuni Shrine in Tokyo on August 15, where Class A war criminals from the Pacific War are enshrined. Photo by Yonhap News.

Shinjiro Koizumi, Japan's Minister of Agriculture, Forestry and Fisheries, who has been mentioned as a leading candidate for prime minister, is moving to visit Yasukuni Shrine in Tokyo on August 15, the day marking Japan's defeat. Photo by Yonhap News Agency

In his report, Park concluded that expanded fiscal policy is inevitable, citing the current parliamentary structure in which the LDP and its coalition partner Komeito have lost their majority in both the House of Representatives and the House of Councillors.

He explained, "To pass fiscal policy legislation requiring parliamentary approval, cooperation from opposition parties is essential." He added, "Potential coalition partners such as the Democratic Party for the People and Nippon Ishin no Kai are demanding expansionary fiscal measures, such as a reduction in the consumption tax rate. The ruling coalition has been reluctant to lower the consumption tax, but for political survival, it may have to accept some of the opposition’s demands."

Additionally, the Bank of Japan (BOJ) is also facing the possibility of another policy rate hike as early as October. Park assessed, "There is a high likelihood that the BOJ will raise rates to the lower end of the estimated neutral range, around 0.75% to 1.00%, and then adopt a wait-and-see approach." He further diagnosed, "In the short term, political uncertainty and fiscal soundness risks will be reflected in the Japanese market, resulting in limited yen weakness and heightened long-term interest rate volatility."

Meanwhile, the LDP Leadership Election Management Committee has decided to hold the party leadership election on October 4 for party-affiliated lawmakers and party members/supporters (members of political support groups). If no candidate secures a majority in the first round, a runoff will be held between the top two candidates.

This content was produced with the assistance of AI translation services.