The notion of Japan as a collection of contradictions – old meets new, east meets west – is a cliché so worn as to have become transparent. So too, as the world awaits the country’s next Prime Minister, is that Japan’s domestic politics is both totally irrelevant and the most important thing of all. Who could forget the sea-change in policy and market dynamics as the country shifted from the Fukuda to the Aso era? Nobody, of course, because it never happened. That, like almost every other transition in recent Japanese political history, was the dampest of squibs. On the other hand, though, few could fail to recall Abenomics – coined immodestly by the assassinated former PM Shinzo Abe – as the most meaningful programme of change, imperfect and partial though it has been, for the Japanese economy and equity market for the last two decades.
On 4th October, Japan’s Liberal Democratic Party will once again change its leader and in so doing select a fresh Prime Minister for the country – the eleventh such transition in your writer’s twenty-something year career. Below, I look at the main contenders for the role and what their elevation could mean for Japan and its equity market, as well as considering the implications of what might be a fundamental change in the nature of Japanese politics. Finally, I touch on the ultimate question of whether any of this really matters to investors anyway.
Officially there are five candidates to replace the woefully unpopular current PM Shigeru Ishiba, but the commentariat are almost unanimous in agreement that only two – Sanae Takaichi and Shinjiro Koizumi – have a hope. Recent polling has given mixed signals with respect to the identity of the front-runner.1 At the highest level, a resolution of the current spasm of political instability could be seen by markets as a good thing. Just as Japan’s Ise Shrine is rebuilt every twenty years to ensure its continuity in the local community, so too does the LDP embrace destruction – of a Prime Ministerial career – to ensure its continuity as the party of Government.2 That the Topix index responded so calmly to Ishiba’s resignation tends to support the idea that markets would welcome the honeymoon period with which a new PM is usually met. Looking deeper though, how might a Takaichi and Koizumi premiership, and the markets response to them, differ from one another?
‘Push Japan to the top again’
Sanae Takaichi, the sixty-four-year-old native of Japan’s ancient capital Nara, was until last year the Minister for Economic Security. Variously described as right-leaning – sometimes far-right – and Abe’s natural successor, Takaichi inevitably names Margaret Thatcher as her political inspiration.3 With a campaign slogan of “push Japan to the top again”, her nationalist bona fides are intact, but could rub up Asian neighbours the wrong way, especially the Chinese. Her objection to Japan’s pacifist constitution means that her election, should it happen, would be seen as further fuel to the already hot Japanese defence sector.
Belligerence aside, the similarities between Takaichi and the Iron Lady do not run deep. Rather than being a reformer with sound money at her heart, Takaichi is a fiscal and monetary dove. In the past, she has advocated slashing consumption tax and last year she said that the Bank of Japan would be “stupid” to raise interest rates.4 When discussing how to combat the effects of inflation on households, Takaichi called on the use of excess tax revenues and said that more government bond issuance “could be unavoidable”.
This school of economics does not make perfect sense to us, and nor is it likely to chime with the financial markets. A Takaichi Prime Ministership could be inflationary rather than deflationary, with higher government bond yields in anticipation of further issuance. Meanwhile, most would expect the Yen to weaken if Takaichi’s dovish fiscal stance was to prevail, boosting exporters profits perhaps but doing nothing for family food budgets already squeezed by imported inflation (below). Maggie would not approve.
A reformer in style more than substance?
If Takaichi is a cosplay Thatcher, Koizumi (seated next to Takaichi in the picture above) is a cosplay…Koizumi. Son of popular former PM Junichiro Koizumi, the forty-four-year-old Shinjiro seems keen to emulate his dad, whose former seat he now holds. Whilst Koizumi Sr promised in 2001 to “destroy the old LDP”, Junior wants it to “restart as if disbanding the party”.5
Koizumi supporters point out that his youth and progressivism – he was vocal in his support of women maintaining their maiden names post-marriage and himself took paternity leave whilst environment minister – are what matters. If, indeed, a Koizumi premiership were to mark a broader shift to new thinking and if this were to penetrate the still conservative corporate sector, this could be a good thing for investors.
There are, however, a lot of ifs here and relatively little substance in Koizumi’s speeches for investors to grip. Whereas the father’s landmark reform, to privatise the state-owned Japan Post, was tangible, the son’s reputation as a reformer seems to be based more upon style than substance.
To Koizumi’s credit, his decision as agriculture minister to release a portion of the government rice reserve was a practical one to alleviate soaring food costs.6 As Prime Minister, longer-term strategic decisions would need to replace the crowd-pleasers available to ministers. Whilst Koizumi may not be the anti-Takaichi, he would at least be not-Takaichi and whereas under her, yields might be expected to rise and the Yen to fall, a more moderate outcome for bonds and currency seems likely under Koizumi.
Will Japan take the path of political fragmentation?
What if the real winner of Saturday’s party election is neither of the candidates, nor the LDP in general? In an era of political fragmentation, where fringe parties are sating political appetites ignored by the majors for decades, Japan is belatedly tending towards the global norm. That Japan is changing PM at all is due to the risible performance of the ruling LDP in successive elections. Newer, smaller parties are gaining ground, typically on the right and always populist in tone.7
Broadly, Takaichi and Koizumi are candidates of the right and left of the centre-right LDP, Japan’s natural party of government for all but two brief stints since in the Post-War era. When one or the other is declared winner, can the party remain sufficiently inclusive to contain the many factions that have been the base of its longevity, or will it splinter? Nicholas Smith, CLSA’s Japanese equity strategist, is worried that the LDP could fragment bringing an injection of political instability that the market would hate.8
“If we want things to stay as they are, things will have to change”
Both Takaichi and Koizumi have the scope to surprise – especially the latter given how much policy latitude he has given himself – but in the Japanese Equities team we think it wiser to allocate our clients’ capital as agnostic to politics as it is possible to be. Sure, Takaichi might thumb the scales towards the defence industry, but global dislocation is taking care of that as it is.
Koizumi could be the rock and roll PM that his father almost was, shaking up society and the corporate sector, but again this is happening anyway. Fresh managerial blood, a dwindling labour force and pressure from shareholders are causing companies to look at their businesses afresh.
Real political fragmentation is a tail risk, rather than a key concern. Post election, the most likely outcome is a resumption of the status quo, hopefully improved by the political competition provided by insurgent parties. For writers on politics, it has become fashionable to quote Tancredi from di Lampedusa’s The Leopard; “If we want things to stay as they are, things will have to change” but perhaps nowhere is that more true than in Japan.
Footnotes
1Japan Polls Split on Whether Koizumi or Takaichi Leads in LDP Race, Bloomberg, 29 Sept 2025
2Japan's holiest shrine is pulled down and rebuilt every 20 years – on purpose | World Economic Forum
3Takaichi Sanae, the hardline nationalist who may soon lead Japan
4Japan’s Takaichi Says More Bond Issuance May Become Unavoidable, Bloomberg, 23 Sept 2025
5Who is Japan's Shinjiro Koizumi? - Nikkei Asia
6Japan farm minister vows to halve prices as rice crisis drags on - Nikkei Asia
7Japan’s politics is entering a messy new era
8Political splinter risk, Benthos, CLSA, Sept 2025
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