New Prime Minister Ine Ajima's "honeymoon period" suddenly comes to an end? Japan faces a triple threat of stocks, bonds, and currencies, with the stock market evaporating $127 billion in a week.

Noticeably, the market's enthusiasm for Japan's new Prime Minister Taro Kono has waned: in the past week, Tokyo-listed companies' market value has evaporated by about $127 billion, and the Japanese yen and government bonds have also plummeted significantly. While consumers have reason to cheer for her unveiling the largest additional spending plan since the pandemic began, investors are concerned that Japan may be overstretching its finances. They also worry that the possibility of the Bank of Japan raising interest rates in the short term to curb inflation is decreasing. Some large asset management companies have begun to target the weaknesses in the Japanese debt market, and the yen continues to struggle. Since Kono won the presidency of the Liberal Democratic Party in early October, the yen has become the worst-performing major currency against the US dollar. Highlighting the challenges faced by the government, traders on Friday largely ignored Finance Minister Kaori Ozawa's warning, where she reminded speculators that authorities may intervene in the foreign exchange market to support the local currency. "Market participants are becoming insensitive to comments from Japanese officials," said Rodrigo Catril, a currency strategist at the National Australia Bank, adding that the yen is turning into a "plaything." "There are solid macro reasons to justify the yen's weakness." He said, "Inflation is significantly higher than the Bank of Japan's target, but the central bank still does not want to raise interest rates. Political influence is a new theme, and the Bank of Japan's credibility is at risk." Interest rate swap contract prices show that there is an 80% chance that the Bank of Japan will keep rates unchanged at its December policy meeting, higher than the approximately 30% probability before Kono won the presidency. In the stock market, risks have exceeded the nervousness related to stimulus measures. On Friday, the Japanese stock market was hit by the downward trend sweeping across Asia, with tech stocks experiencing significant declines. After rising when Kono took power last month, the Nikkei 225 index, which includes many large Japanese exporters and technology companies, fell by 3.5% this week. The broader Topix index dropped by 1.8%. Across all Tokyo-listed companies, the market value loss this week was around 20 trillion yen, equivalent to $127 billion. This figure contrasts with the announced general account expenditure stimulus plan of 17.7 trillion yen on Friday and the package plan worth 21.3 trillion yen. Additionally, Japan has been involved in a diplomatic dispute with China, adding risk to the stock market. China has informed Tokyo that it will temporarily suspend the import of Japanese seafood. According to sources, China has also frozen the review of new Japanese films. Meanwhile, in the Japanese government bond market, bearish investors have started shifting their focus from ultra-long-term bonds to potential opportunities in 5 to 10-year bonds. "The 5 to 10-year part is now where my biggest Japanese government bond short position lies," said Takeshi Shimizu, Chief Investment Officer of Fixed Income at Asset Management One, one of Tokyo's largest asset management companies. George Saravelos, Global Forex Research Head at Deutsche Bank, even warned that Kono's spending plan could trigger disorderly capital outflows, reminiscent of the turmoil that nearly shattered the UK bond market in 2022. According to the latest data from the Japan Securities Dealers Association, major investors including domestic banks, insurance companies, and overseas accounts have reduced their net purchases of 10-year Japanese government bonds to the lowest level since October 2023. This has pushed up the yield on Japanese bonds, increasing the financing costs of the heavily indebted Japanese government. Idanna Apio, Portfolio Manager at First Eagle Investments, said that Kono's spending plan makes her feel "a bit more nervous."