Nikkei extends record rally as Japan makes history with first female prime minister

Japan’s Nikkei stock index closed at a record high on Tuesday, led by consumer shares, after budget dove Sanae Takaichi voted in parliament to become the country’s first female prime minister.

Earlier in the day, the stock index rose as much as 1.55% but gave up most of its gains in choppy trading after Japan’s two parliaments confirmed Takaichi as prime minister.

The Nikkei 225 Index closed 0.3% higher at an unprecedented 49,316.06. The broader Topix pared early gains and settled near the flatline. Japanese government bonds rose and the yen weakened.

As Takaichi campaigned for and won the leadership of the ruling Liberal Democratic Party earlier this month, the so-called “Takaichi trade” emerged that was bullish on stocks and bearish on long-term bonds and the yen. But her ascension to the prime minister’s seat was postponed after Komeito, a longtime political partner, split from the coalition.

During the previous session, the Nikkei soared after the LDP found a new partner in the Japan Innovation Party, known as Ishin, to shore up Takaichi’s support in the Diet.

The coalition will still be a minority in government, which could limit the scope of their budget plans, said Yusuke Matsuo, senior market economist at Mizuho Securities. “We believe the government will be forced to take a pragmatic approach to economic policy and do not expect Takaichi trade to gain significant traction in the medium term,” Matsuo wrote in a note. Takaichi received 237 votes in a lower house vote on Tuesday, putting him at the top of the list. majority of the chamber with 465 seats. Market attention is now turning to who can fill her cabinet with signals on how the new government will approach spending and debt management.

The new prime minister has finalized a plan to appoint former regional revitalization minister Satsuki Katayama as finance minister, broadcaster FNN reported on Tuesday. Katayama, an upper house lawmaker and former finance ministry bureaucrat, told Reuters in March that Japan’s economic fundamentals suggest the yen’s real value is stronger than where it has been trading recently.

There were 125 advancers on the Nikkei index, compared to 99 decliners. The biggest gainers were video game maker DeNA, which gained 6.6%, followed by online fashion retailer ZOZO, with an increase of 4.1%.

Japanese government bond prices generally rose, pushing yields lower. Ten-year Japanese government bond yields fell 1 basis point (bp) to 1.655%, and five-year yields fell 2 basis points to 1.22%. The yen fell 0.4% to 151.36 against the US dollar.

Structural reforms and strategic investments under the new government could come to define a new version of the Takaichi trade, said Naka Matsuzawa, chief macro strategist at Nomura Securities.

“The new Takaichi trade is more of a flattening of the yield curve and a stock market rally driven by domestic demand stocks,” Matsuzawa said. “The stock market is likely to lose momentum after investors realize that Takaichi is not as reflationary as they thought and that the yen is actually strengthening.”