【By Observer News, Xiong Chaoran】After Sanae Takeda was elected as the Prime Minister of Japan, the market experienced a wave of rising prices. However, due to the tension caused by her government's upcoming stimulus plan and the sudden change in the geopolitical situation, her administration is facing its first major market test, with Japan suffering a "triple loss" in stocks, bonds, and the currency.

Bloomberg reported on November 20 that due to market concerns that Takeda's spending plan would further deteriorate Japan's fiscal condition, Japanese government bonds fell sharply, exacerbating the weakening of the yen, which further declined towards a dangerous area that could trigger intervention. At the same time, the Nikkei 225 Index recorded its largest drop since April this year.

With the expectation that the Takeda government will announce a long-awaited economic stimulus plan on November 21, the report described the current "sell Japan" trading situation as just beginning. One market analyst expressed concern that after the Takeda government announces the plan, there may be another triple decline in stocks, bonds, and the yen, similar to the market turbulence Japan faced under the short-lived Prime Minister Truss in 2022.

Currently, Japanese bond yields are at their highest levels in decades, the overnight exchange rate of the yen has fallen more than 1%, and these factors continue to pressure the market. Although the stock market rebounded due to Nvidia's optimistic earnings report, Bloomberg emphasized that the risks from the recent diplomatic tensions between China and Japan still exist.

"If Takeda loses policy credibility, investors will start selling all assets," said Mark Dowding, Chief Investment Officer of BlueBay Asset Management, a subsidiary of Royal Bank of Canada (RBC): "If people feel that signs of policy mistakes in Japan are increasing, we will definitely increase our positions in short-end curve trades."

Photo of Prime Minister Sanae Takeda of Japan

Bloomberg pointed out that the cross-asset selling this week highlights the fragility of the so-called "Takeda trade" concept. This trading concept pushed the Japanese stock market to record highs in October this year and bet on Takeda's fiscal expansion policy to revitalize economic growth.

However, by November 19, less than a month after Takeda became Prime Minister, the Nikkei 225 Index had erased all gains since her election, sounding a warning for investors.

In particular, after Takeda made serious erroneous remarks on Taiwan and refused to correct them, Sino-Japanese relations were shaken. With China issuing travel and tourism warnings, stocks of Japanese department stores, transportation, and consumer sectors related to tourism were sold off on November 17. The shares of Mitsukoshi Isetan Department Store closed down 11.31%, Takashimaya closed down 6.18%, Shiseido, which relies heavily on Chinese tourists, closed down 9%, and the operator of Tokyo Disney Resort, Oriental Land Company, closed down 5.68%.

As of November 19, the two major indices of the Tokyo stock market continued to fall for four consecutive days, with the Nikkei index falling over 2,700 points in total. Investors are worried that Takeda's serious erroneous remarks on Taiwan have led to continued deterioration of Sino-Japanese relations, not only causing significant declines in stocks of industries closely related to inbound consumption such as department stores, transportation, and hotels, but also some companies that rely heavily on the Chinese market have been sold off by investors due to uncertain performance prospects.

In the Tokyo foreign exchange market, since Takeda was elected as the president of the Liberal Democratic Party and then became the Prime Minister of Japan, the yen has re-entered a downward trend and continues to weaken.

In recent days, the yen's exchange rate against the U.S. dollar has dropped to the lowest level since January this year, mainly due to the weakening of market expectations for a Federal Reserve interest rate cut and the strengthening of the U.S. dollar. Currently, the yen is hovering around 157 yen per U.S. dollar—should it break below 158.87, it would create the weakest level since July last year.

The exchange rate movement of the yen over a month since Sanae Takeda took office, Google Finance

In the Tokyo bond market, long-term Japanese government bonds have generally fallen due to selling, leading to rising yields that have repeatedly broken historical high points. On November 19, due to low investor demand for purchasing bonds, the yield on newly issued 10-year government bonds rose to 1.775%, the highest since June 2008. On November 20, the 10-year government bond yield rose to 1.83%.

The six-month trend of the 10-year Japanese government bond yield, which has been continuously rising, MacroMicro

"The honeymoon period is over," said Amir Anvarzadeh, a Japanese equity strategist at the consulting firm Asymmetric Advisors Pte. Despite the initial excitement of traders about Takeda and her stimulus policies, many now feel they are "drowning."

Anvarzadeh stated that the market sentiment was not only worsened by concerns about fiscal expenditure. In the past two weeks, Takeda canceled the government's annual budget balance target, vowed to reduce the focus on shareholders in Japanese corporate governance guidelines, and provoked diplomatic disputes with China. He believes that these actions have made investors uneasy, leading to pressure on the stock market and rising yields.

Under the current circumstances, the release of the stimulus plan will be the next key test. Takeda's proposed plan is expected to exceed the 13.9 trillion yen package introduced by her predecessor Ishiba, and some lawmakers are even pushing for an additional budget of about 25 trillion yen.

"The amount of 25 trillion yen is huge, and people question whether it is really necessary," said Hiroshi Nagoka, Chief Strategist and Fund Manager at T&D Asset Management. He worries that after the package is announced, there may be a "triple drop"—simultaneous declines in stocks, bonds, and the yen, similar to the market turbulence Japan faced under the short-lived Prime Minister Truss in 2022.

Alex Loo, a macro strategist based in Singapore at TD Securities, said that if Takeda seeks a "huge budget," Japanese long-term bond yields may continue to rise, while the yen could weaken to 160 yen per U.S. dollar.

Bloomberg noted that usually, a weaker yen supports the Japanese stock market, especially stocks of export-oriented companies, but concerns about the Sino-Japanese diplomatic disputes, as well as the global tech stock and cryptocurrency corrections, have left the Japanese benchmark index without support.

"Now there is a very unusual combination: despite the weak yen, the Nikkei index is performing poorly; despite rising yields, the yen is still weak," said Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank.

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