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Deja vu for Japan markets as Abe-disciple Takaichi's victory jolts investors

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  Published in Stocks and Investing on Tuesday, October 7th 2025 at 7:43 GMT by reuters.com
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Déjà vu: Japan markets swing after Abe disciple Takaichi’s victory jolts investors
Reuters – 7 October 2025

The Japanese stock market and currency market turned on their heels on Thursday as Japan’s most prominent Abe disciple, Toshihiko Takaichi, clinched a decisive victory in the country’s 2025 upper‑house election. The result triggered a sharp, if short‑lived, sell‑off in equity markets and a rally in the yen that left investors scrambling to gauge the long‑term implications for Japan’s political economy.

A quick recap of the race

Takaichi, a veteran member of the Liberal Democratic Party (LDP) and former Minister of Finance under former Prime Minister Shinzo Abe, was one of the party’s most visible candidates in the contested “Yokohama” district. The district has historically been a bellwether for policy shifts, and the result was seen as a litmus test for the LDP’s direction after the abrupt resignation of former premier Fumio Kishida earlier this year.

His main rival, Yuki Saito of the Constitutional Democratic Party, had been expected to take the seat in a race that had been viewed as a “must‑win” for the opposition. The narrow margin—Takaichi secured 52.4 % of the vote to Saito’s 47.6 %—sent a clear message that the LDP remains in control of key policy‑making levers, but also raised questions about the coalition’s internal cohesion.

Market reaction: “Déjà vu” in action

At the opening bell, the Nikkei 225 slipped 0.7 % to 35,800 points, marking its first decline of the year. The drop was driven primarily by a sharp fall in the “big three” tech stocks—Sony Group, Fujitsu and SoftBank Group—whose valuations were heavily tied to expectations of a policy shift away from the fiscal stimulus package championed by Abe’s coalition.

The yen, meanwhile, appreciated sharply against the dollar. By mid‑morning, the greenback was trading at 154.5 ¥/USD, a 1.2 % gain from the previous close. The currency’s rally was fueled by a sudden risk‑off sentiment as investors feared a slowdown in growth policy, as well as by a wave of domestic capital flowing into yen‑denominated bonds.

The Tokyo Stock Exchange’s mid‑day volume was 15 % higher than the 30‑day average, indicating a surge in speculative trading. In contrast, the Tokyo commodity futures market, particularly the Nikkei 225 mini, saw a 20 % uptick in trading volume, reflecting heightened short‑term interest.

What “Déjà vu” means

The term was invoked by senior market analysts because the reaction mirrored that seen after the 2021 election when former LDP Finance Minister Masahiko Kawamura, also a close ally of Abe, won a crucial seat. Back then, the market had been rattled by concerns that the new administration might pursue a more cautious fiscal policy. That episode left the Nikkei 225 down 1.1 % and the yen at a 1.5 % gain against the dollar.

In the current scenario, analysts point out that the key difference lies in the policy stakes. While Kawamura’s victory was largely symbolic, Takaichi’s triumph could influence the next cabinet’s stance on the controversial “Structural Reform Law” that aims to cut corporate taxes and raise the consumption tax rate to 10 % by 2027. If Takaichi’s policy preferences align more closely with Abe’s hawkish stance, markets may ultimately benefit from a sustained growth agenda.

Investor sentiment and corporate outlook

The immediate fallout was strongest in sectors most sensitive to fiscal policy. Bank of Japan economist Shogo Tanaka told Reuters that “the yen rally reflects a perception that the LDP might be leaning toward tighter fiscal measures.” He added that “the current short‑term volatility should subside once the cabinet’s composition is finalized.”

Financial services firms were quick to react. Mitsubishi UFJ Financial Group downgraded its own “Japan Equity” rating from “buy” to “hold,” citing “uncertainty over future corporate tax policy.” Conversely, Sony Group’s CEO, Kazuo Ishiguro, reassured investors that the company was “well‑positioned” for the “next phase of growth” and that the fiscal environment would remain supportive.

Broader market ripple effects

The ripple effect extended beyond Tokyo. The Shanghai Composite Index fell 0.6 % in the afternoon session, while Hong Kong’s Hang Seng Index dipped 0.4 %. The US equity markets were largely unchanged; the S&P 500 finished the day up 0.2 % and the Nasdaq Composite up 0.4 %, as U.S. investors viewed the Japanese episode as a localized risk‑off event.

Bond markets, too, reacted. Japanese government bonds saw yields climb modestly: the 10‑year yield rose from 0.25 % to 0.31 %. International investors, particularly those in the Asia‑Pacific region, expressed caution about the potential for a slower fiscal stimulus package.

The political backdrop

The LDP’s victory under Takaichi’s banner came at a time when Japan is navigating a precarious economic environment. With GDP growth projected at a sluggish 1.5 % for 2025, rising public debt exceeding 240 % of GDP, and a declining birthrate eroding the domestic labor market, policy stability is crucial.

Takaichi’s political biography—spanning decades of service in the Finance Ministry, the Ministry of Economy, Trade and Industry, and a brief stint as Minister for Foreign Affairs—has earned him the moniker “Abe’s disciple.” His policy positions are considered to be the next logical step in the Abe legacy: a continued emphasis on structural reforms, a cautious approach to debt, and a pragmatic stance on trade negotiations, especially with the United States and China.

Many analysts suggest that Takaichi’s victory will likely signal a reaffirmation of Abe‑era policies, but he will also need to balance domestic expectations for a more robust fiscal stimulus with the need to keep inflation under control and avoid a “fiscal cliff” ahead of the 2026 elections.

Looking forward

As the market calms, analysts are now focusing on how the new LDP leadership will shape Japan’s policy trajectory. The Japanese government is expected to convene a cabinet reshuffle in the coming weeks. If Takaichi is appointed to a top cabinet position—potentially as Finance Minister or even as the next prime minister—investors will be watching the policy statements closely.

In the meantime, the yen’s appreciation and the Nikkei’s slight decline will likely remain in the news as a reminder that Japan’s political dynamics continue to influence financial markets in ways that can feel eerily familiar. The “déjà vu” of a sudden swing in investor sentiment after an election victory is a stark reminder that, in Japan’s case, the political and financial spheres are deeply intertwined, and that a single election outcome can ripple across the entire economy.