Yen Weakens and Stocks Jump as Markets Prepare for Pro-Stimulus Takaichi to Lead Japan

The Japanese yen weakened sharply on October 20 as investors responded to the mounting likelihood that Sanae Takaichi will become Japan’s next prime minister. Known for her support of substantial fiscal stimulus and looser monetary policy, Takaichi’s potential leadership has rekindled what market participants call the “Takaichi trade”—this involves bullish positioning in Japanese equities and bearish views on the yen. The exchange rate moved above ¥150 per U.S. dollar amid heightened activity and renewed appetite for risk assets, while global markets broadly improved as trade tensions between the U.S. and China appeared to soften and concerns about U.S. regional bank stress receded.

Takaichi’s policy orientation matters. Historically, a weaker yen supports export earnings and lifts Japan’s large manufacturing and technology-exporting firms. By signaling that Japan is likely to favour expansionary fiscal policy and avoid near-term interest-rate increases, investors recalibrated their portfolios accordingly. Japanese stock indices jumped, while bond yields climbed on the expectation of increased issuance and a reduced probability of rate hikes from the Bank of Japan. This alignment of fiscal and monetary policy has attracted foreign capital into Japan’s financial markets, especially into sectors that benefit from a weaker currency and domestic stimulus.

However, the backdrop is complex. Though political clarity appears to be returning—through Takaichi’s coalition talks with the Japan Innovation Party—investors remain cautious about how her broader agenda will be implemented amid Japan’s structural challenges. With inflation above target, an ageing population, and weak productivity growth, a shift toward stimulus creates trade-offs. In particular, a weaker yen increases import costs and could further squeeze households already coping with rising prices for energy and raw materials. And while the stock market cheered the prospect of reflation, bond-holders are wary of larger deficits and the risk of faster inflation or rising yields.

Globally, Japan’s shift is being watched closely. A weaker yen may redirect global export flows, influence Asian supply chains, and impact commodity flows—especially given Japan’s heavy dependence on imported energy and materials. Moreover, with Takaichi likely to align Japan more closely with U.S. defence and technology policies, the risk of broader geopolitical entanglements may rise, which in turn could affect investor sentiment across the region.

From a capital-markets perspective, the movement tells a broader story about how policy expectations are increasingly powerful drivers of asset allocation. The yen’s drop is not just a currency move—it’s a reflection of a world where monetary policy, fiscal strategy, and geopolitical alignment are collapsing into a single investment narrative. For international investors, Japan may reappear as a tactical opportunity—but it is one wrapped in risk: currency weakness benefits exporters, but raises import costs; stimulus supports growth, but pressures public finances; political change signals clarity, but introduces structural uncertainty.

In essence, the markets are betting that Japan is entering a reflation phase under Takaichi, and are positioning accordingly. Whether the optimism holds will depend on how effectively she navigates fiscal discipline, inflation control, and international coordination. In the meantime, the yen’s move offers a window into how policy pivots can reshape capital flows and asset valuations—not just in one country, but across global markets.