The Nikkei's strength is not primarily driven by expectations of broad fiscal stimulus. Instead, equity investors are betting on the success of PM Takaichi's targeted policies to boost sentiment and spending among middle and lower-income households. This potential consumption recovery is a key upside catalyst that the market has not fully priced in yet.
Contrary to market fears of undisciplined spending akin to 'Abenomics', Prime Minister Takaichi's initial policy platform suggests a focus on targeted income redistribution. Policies like a refundable credit tax system and cutting unnecessary subsidies indicate a fiscally neutral or even tighter stance, rather than net fiscal expansion.
The Takaichi government has a political incentive to support the Bank of Japan's monetary normalization. Allowing inflation and yen depreciation to continue unchecked could undermine consumer confidence and her high approval ratings. Therefore, a gradual BOJ rate hike could be seen as a politically astute move to maintain stability and popular support.
The FX market is disproportionately focused on the immediate outcome of the next BOJ meeting, causing the Yen to weaken as rate hike odds are priced out. This ignores the largely unchanged medium-term outlook for monetary normalization. This short-termism has decoupled the Yen from longer-term rate spreads, creating a potential tactical opportunity.
Under 'Sanae-nomics,' Japan's growth strategy is pivoting towards sectors linked to national security. This includes not only defense and heavy industries but also advanced technology like AI, robotics, and quantum computing, as well as energy and food security. These areas are expected to be core beneficiaries of the new administration's industrial policy.
A significant perception gap exists between investor groups. Foreign investors largely expect aggressive fiscal expansion from PM Takaichi, viewing her policies as a continuation of Abenomics. In contrast, domestic investors, recalling that the Abe administration actually narrowed deficits, are less concerned about fiscal discipline and have a more nuanced view.