Japanese shares surged to a record high today, while the yen and long-term bonds tumbled as Sanae Takaichi was confirmed as the country's next premier, stoking bets on a revival in big spending and loose monetary policy.
The Nikkei 225 index soared 4.75% to close at 47,944.76. It traded as high as 48,150.04, breaking through three psychologically key thousand-point barriers for the first time ever. The broader Topix gauge jumped 3.1%.
The 30-year Japanese government bond (JGB) plunged, sending the yield to a record high. Meanwhile, the yield on the two-year note slid, reflecting expectations of later rate hikes by the Bank of Japan. The yen tumbled nearly 2% against the dollar and traded at an all-time low versus the euro.
Takaichi was considered to have the most expansionist fiscal and monetary agenda among five candidates in the Liberal Democratic Party race to replace hawkish Prime Minister Shigeru Ishiba.
"The Nikkei was on course to reach as high as 48,000 by year-end, but because Takaichi was chosen as the LDP leader, it shot up toward that level already," said Hitoshi Asaoka, the chief strategist at Asset Management One.
"The market welcomes her spending policy, but whether she can achieve that goal is not certain, as the LDP is still a minority party. The Nikkei may retreat once before year-end", the strategist added.
Takaichi began eyeing cabinet posts today, with media reporting she planned to install former defence minister Minoru Kihara as chief cabinet secretary and bring back ex-foreign minister Toshimitsu Motegi as the country's top diplomat.
Her pick for finance minister, which will be closely watched by investors, was unclear.
In the lead-up to the LDP race, a "Takaichi trade" emerged - long on stocks and bearish on Japanese government bonds, particularly longer maturities - positioning for a win by the veteran lawmaker who is a devotee of the "Abenomics" stimulus policies of the late Shinzo Abe.
Yields on two, five, and 10-year JGBs had all reached levels not seen since the financial crisis in 2008 in the run up to the LDP election on bets the BOJ could raise rates as early as this month's meeting. Long-term JGB yields had fallen, flattening the so-called yield curve.
In a run-off vote on Saturday, Takaichi beat farm minister Shinjiro Koizumi, who was seen as more laissez-faire on monetary policy.
"The market had bet that Koizumi would win, and they were positioned for curve flattening," said Miki Den, the senior Japan rate strategist at SMBC Nikko Securities. "But because the bet on Koizumi was so strong, it will take time to unwind the flattening positions."
As a candidate, Takaichi proposed boosting investment in strategic business sectors, including artificial intelligence, semiconductors, nuclear fusion and defence. Shares in those sectors were among the biggest gainers in Tokyo trading.
Mitsubishi Heavy Industries, a major military contractor, jumped 11%, and Japan Steel Works, a supplier of nuclear energy machinery, soared more than 15%.
After her LDP victory, Takaichi told a press conference the government and central bank must work closely to ensure Japan's economy achieves demand-driven inflation backed by rising wages and corporate profits.
