Japan has attracted considerable market interest over the past few weeks, starting with the historic election of Sanae Takaichi as the nation’s first female prime minister. She is simultaneously the head of the Liberal Democratic Party (LDP), which has dominated Japanese politics throughout the post-war period, but has been losing voters recently to more conservative parties. As such, her ascendancy marked a bold political move to shore up support and a shift to the right in terms of policy. Much of her platform echoes that of her mentor, former prime minister Shinzo Abe, who famously launched the “Three Arrows” of reform in 2012.

Starting with fiscal policy, Takaichi has announced a JPY 21.3 trillion (USD 136 billion) package of tax cuts and spending increases to spur growth. Under Shinzo Abe, robust fiscal and monetary policy easing was designed to jolt the Japanese economy out of decades of deflation. Now, with the benefit of hindsight, we can say that Japan has firmly cast off falling prices, and the current run rate of core CPI is around 3%. On average, real wage growth has exceeded inflation, meaning that households are enjoying real gains in disposable income.

Another key success of the Abenomics reform package was the introduction of sweeping corporate governance reforms that made firms more accountable to shareholders. We see Takaichi as sustaining this effort, as higher profitability and investment returns have repositioned Japan as an attractive investment destination again.

On the foreign policy side, Takaichi has taken a hawkish stance vis-à-vis China, leading to an increase in political noise between the two regional giants. Our baseline view is that the economic costs of these tensions will ultimately be limited, and a détente will emerge in due course. At the same time, Takaichi has made strides with US President Trump, and we would not be surprised to see the current 17% US import tariff on Japanese goods decline over time.

With regards to the yen, the new Minister of Finance, Katayama, has indicated that she would be comfortable with an exchange rate of 120 against the US dollar, implying a substantial appreciation from current levels. The general perception is that a weak yen is good for exporter profits and that currency depreciation supports the equity market.

In our view, the Japanese authorities’ primary goal is to avoid moves in the yen that are deemed too rapid, in either direction. Also, a USD/JPY level of 160 appears to be a ‘line in the sand’ that triggers first verbal intervention, and then secondly outright market intervention by the Ministry of Finance to strengthen the yen again.

A plausible reason is that Japan is a net food importer, and a falling currency automatically boosts food inflation. To illustrate, in 2024 Japan ran a large ‘food deficit’ of JPY 7.7 trillion (USD 49 billion) – causing considerable pressure on households and arguably why Takaichi is now pushing for tax cuts on gasoline and promoting energy bill subsidies.

Lastly, is the yen cheap?

One way to answer this is to consider the Real Effective Exchange Rate (REER), which measures a currency’s competitiveness relative to its trading partners. When the index rises, it means that the currency is becoming expensive (less competitive) and vice versa. The Japanese REER is back to levels last seen in the early 1970’s. As such, we conclude that the yen is attractively valued and expect moderate appreciation over 2026, supported by very gradual interest rate hikes by the Bank of Japan.

(Stefan Hofer is Chief Investment Strategist APAC at LGT Private Bank)

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.