- Sanae Takaichi is set to become Japan’s first female Prime Minister1
- This will be Japan’s 4th Prime Minister in 5 years3
- Inflation is running at 2.7% in Japan, with the cost of rice nearing a record high4
Political stability is seemingly in short supply this year with leadership shake-ups and party popularity in constant flux. Japan is no exception, with another Prime Minister announcing his resignation after less than a year in the job just last week. What has emerged though, is a milestone moment for the country with Sanae Takaichi now poised to become their first female Prime Minister. It won’t be smooth sailing for her though with the long-standing coalition government breaking down, inflation remaining sticky and a weak currency.
What’s been going on?
Since Shinzo Abe’s resignation due to health issues back in 2020, Japan has not been able to settle upon a leader with longevity. First, Yoshihide Suga, who was widely viewed as a safe pair of hands, saw his ratings collapse within a year as frustration over his pandemic response and a lack of vision mounted. He stepped down, making way for Fumio Kishida, who managed to win the general election later that year.
Kishida’s mandate, however, unravelled just as quickly with a major corruption scandal rocking the Liberal Democratic Party (LDP). Inflation surged, and the Yen fell to historic lows with voter trust evaporating. In 2024, Kishida was replaced by Shigeru Ishiba. Within days of taking office, Ishiba called a snap election, a bold move – but it backfired, and the party suffered its worst defeat in over a decade losing its majority in the powerful lower house, only to be followed by losing the upper house in the trailing months. Ishiba stepped down last week, and Sanae Takaichi has since been voted in as leader of the ruling conservative party3.
Party approval rating (% of voters)
Source: Capital Economics, 2025
What could it mean for financial markets?
The surprise victory of Abe’s protégé, Sanae Takaichi, sparked an early rally in Japanese equity markets and sent the Yen sliding. Investors jumped on expectations that her policies would boost the defence, energy, semiconductors, and advanced tech sector earnings. Takaichi is also seen as a supporter of fiscal stimulus and loose monetary policy.
If fiscal loosening were to transpire, we believe the Central Banks case for tighter monetary policy would strengthen – and we’d see interest rates climb higher (currently at 0.5%, and markedly lower than the rest of the developed world).
But whether she can deliver is another question. Coalition talks have hit a wall, and last week marked the end of the LDP’s 26-year partnership with Komeito. Without a solid governing bloc, Takaichi’s agenda, and even her grip on power, looks uncertain. With all of this to digest, markets have been volatile and confidence has fallen2.
Bowmore portfolios
We took the decision to increase the weighting of Japanese equities within portfolios (now at c.12% of the overall equity allocation) back in late 2022 when valuations were significantly attractive and the first signs of moderate inflation were beginning to show. This proved to be a positive investment decision, with our chosen investments providing 70.9% and 51.5% in performance since then.
Moving forward, our current thinking and research is leading us to maintain position size, but with large cap valuations approaching fair value, to look at pivoting part of our allocation towards more domestically facing smaller cap companies who will benefit from a strengthening Yen – a stronger Yen equals more purchasing power and therefore lower input costs – and increased consumer confidence.
Source: Alpha Terminal, market data as at 16/10/2025
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.
Sources
1 Reuters, 2025
2 AVI, 2025
3 BBC, 2025
4 The Japan Times, 2025