Sanae Takaichi’s victory in Japan’s LDP leadership race has shaken financial markets, affecting the yen and Japanese government bonds. Experts say the reaction may be overblown, highlighting uncertainty and volatility following political shifts in Tokyo.

Tokyo

The recent election win by Japan's new prime minister, Takaichi, has triggered notable fluctuations in the Japanese yen and government bond markets. Market participants initially reacted strongly, anticipating expansionary fiscal and accommodative monetary policies. However, analysts believe this response may be an overreaction, as Takaichi has moderated her policy stance.

The Japanese government bond (JGB) market, particularly at the long end, has seen increased selling and a steepening yield curve. This trend is mirrored in other developed markets, including the US, where bond volatility remains low despite ongoing developments. Experts note that while there is still room for further movement in JGBs, the situation is evolving and closely tied to both domestic policy and global market dynamics.

Takaichi win jolts yen and Japanese government bonds

Let's talk about the direction of the Japanese yen then because we have of course sitting it seen it sitting around that 150 mark. Do you see that being a sustained reaction in the currency. I think there is definitely some some more room to sell off. But at the same time I think that this might be an overreaction. So on the first day of the victory of the election I think the market overreact. I don't think I don't think the new prime minister will actually deliver the expansionary fiscal policy or very accommodative monetary policy as people expected because she she actually softened her tone. And at the same time if you look at the interest rate differential of the Japanese yen versus U.S. dollar I think the fair value should be around 142 or 143. So I think it's probably a kind of market overreaction. OK. So Tracy what does that mean then for this. This trade that's been very popular and profitable which is shorting J.G.B. particularly the long end this year. Do you think that that trade shorting the J.G.B. space continues to make sense or would you take the other side of that trade. I think J.G.B. is definitely the anchor of global global bond market especially the developed countries bond market. I think if this new prime minister she she wants to do more fiscal easing and the inflation will continue to go higher. I think the long end potentially have more room to sell off. And at the same time you see the curve steepening and the correlation among all developed bond market actually relatively high. So you see even the U.S. the U.S. bond market. You see bear steepening as well. So I think it might not be the right time to long J.G.B. yet. There is still more room for them to sell off and the curve steepening. And to your point I mean we've seen the 30 year bond yield for instance rising to a fresh record this morning. But what's been interesting at the same time you've seen this sort of gyrations particularly the longer end of the curve in Japan actually treasuries and expected volatility has been at its lowest level in around four years. That's sort of being attributed to the government shutdown. But do you see that's staying the course. And what's your expectation of where trading activity goes from here for the U.S. bond market. I think the way we have seen the curve steepening actually have some kind of a reversal in late September and beginning of October until this victory of of Takahashi sound. So the curve steepening we might start to see the curve steepening again. But at the same time you see a lot of exciting development on the front. So the hope is for the development to boost the productivity. And if the productivity goes higher in the U.S. I think the inflationary pressure will be more more mitigated. And then the long end should have some support. And at the same time you you still have Treasury Secretary Scott Bassett. He has a lot of tool to use to manage the yield curve. Right. He can front load the TBO issuance rather than issuing the long end. So there is definitely some some some some floor to the long end. And we still see there is some value in the long end. But at the same time it's it's the volatility is coming back because of this JGB development.

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