Japan: Analyzing Financial Market Reactions to the LDP Presidential Election

■ Based on the LDP's proposals for the 2024 presidential election, a situation is developing where fiscal expansion drives yen depreciation and stock prices higher.  
■ Whether these proposals will be adjusted as the economic and political landscape evolves will be of interest. 
 
   The LDP has set the schedule for the presidential election, announcing it on September 22, with voting and vote counting scheduled for October 4. The election will be held using a "full-standard" format, with a total of 590 votes from Diet members, party members, and supporters (295 each). Based on the 2024 LDP presidential election vote count and opinion polls, the race is expected to be a core contest between Mr. Takaichi and Mr. Koizumi. The situation is extremely fluid, and it is too early to predict the direction of financial and fiscal policy, including any coalition with opposition parties. However, analyzing the potential financial market reaction to the presidential election based on the policy proposals of both candidates is necessary. 
 
   The increased demand resulting from fiscal expansion will support stock prices, and sectors favored by either candidate's proposals are also more likely to experience stock price increases. Looking at the proposals presented during the 2024 presidential election, Koizumi proposed measures to address high prices, promote regulatory reform, and strengthen diplomacy and defense capabilities. Takaichi, emphasizing Japan's sound fiscal policy, advocated for promoting growth investment through strategic fiscal spending and also strengthening food, energy, and resource security. Defense-related sectors, which both candidates emphasize, are expected to benefit significantly, as are sectors related to regulatory deregulation, energy, and security. Although domestic political instability will persist in the short term, overseas investors are unlikely to remain as cautious about the Japanese stock market as they have been in the past. On the one hand, as inflation subsides, corporate nominal earnings growth is expected to expand. On the other hand, efforts by major companies to improve capital efficiency have become more routine, leading to rising return on equity (ROE) and a gradual recognition of EPS growth. 
 
   There is a clear divergence in financial policy: Koizumi has yet to make a definitive statement, while Takaichi has explicitly opposed interest rate hikes. This may further complicate the impact on government bond yields and exchange rates. Based on the policy orientations of the two leaders and considering the LDP's coalition with the opposition, market expectations for fiscal expansion are more likely to increase. However, if fiscal uncertainty intensifies and yields rise, this could create selling pressure and weaken the yen. Conversely, if the market associate’s fiscal expansion and the accompanying yen depreciation are linked to rising inflation pressures, it could reinforce expectations of a Bank of Japan rate hike, leading to higher yields and a stronger yen. 
 
   Furthermore, it remains to be seen whether the "high-market trade"—yen depreciation and stock price appreciation driven by associations of fiscal expansion and monetary easing—can continue. With inflationary pressures persisting since the 2024 presidential election, will Takaichi continue to push for monetary easing, which could contribute to yen depreciation? Will he persist with the consumption tax cuts, which are broadly opposed by the LDP mainstream? Close monitoring of Takaichi's policy stance is warranted.