Japan ETFs rally sharply as election of party leader Takaichi signals 'fiscal taps may stay open'

By Christine Idzelis

ETFs that buy Japanese stocks have surged this year, beating the U.S. stock market

Newly elected Liberal Democratic Party (LDP) leader Sanae Takaichi celebrates after winning the LDP leadership election on Oct. 4 in Tokyo.

Exchange-traded funds that buy Japanese stocks rallied Monday, adding to their surge this year, after the election of Sanae Takaichi to lead Japan's Liberal Democratic Party put her on track to become the country's next prime minister.

The iShares MSCI Japan ETF EWJ and JPMorgan BetaBuilders Japan ETF BBJP each rose around 1.8%, while the WisdomTree Japan Hedged Equity Fund DXJ jumped almost 2.8%, according to FactSet data. Shares of all three U.S.-listed ETFs have surged more than 20% this year through Monday.

Investors appeared to be cheering the prospect of fiscal stimulus such as more spending and tax relief, while considering the possibility that Takaichi could press the Bank of Japan to put the tightening of monetary policy on hold.

"Japan's dawn opened not to the clang of temple bells but to the hum of money machines," said Stephen Innes, managing partner at SPI Asset Management, in a note Monday. "Sanae Takaichi, the incoming prime minister and Japan's first woman to hold the post, arrived not with rhetoric but with resonance - a promise that fiscal taps may stay open long enough for the Nikkei to bathe in stimulus sunlight."

Takaichi is the likely next prime minister after her election Saturday as the first female president of Japan's long-governing Liberal Democrats, according to an Associated Press report.

"Staunch conservative lawmaker Sanae Takaichi prevailed in the Liberal Democratic Party's election," Yardeni Research wrote in a note Sunday. "For the LDP to retain power, Takaichi must form a governing coalition with opposition parties, many of which favor tax cuts."

The top three holdings of both the iShares MSCI Japan ETF and JPMorgan BetaBuilders Japan ETF as recently as Oct. 3 were Toyota Motor Corp. (TM) (JP:7203), Mitsubishi UFJ Financial Group (MUFG) (JP:8306) and Sony Group Corp. (SONY) (JP:6758), according to data on the websites of BlackRock and J.P. Morgan.

The three biggest exposures for the WisdomTree Japan Hedged Equity Fund - which invests in Japanese stocks while hedging exposure to fluctuations between the U.S. dollar DXY and the yen (USDJPY) - were Mitsubishi UFJ Financial Group, Toyota and Japan Tobacco Inc. (JAPAY) (JP:2914) as of Oct. 3, according to data on WisdomTree's website.

"Takaichi, known for her pro-stimulus tilt and a fondness for what she calls 'demand vitality,' is viewed as a continuity candidate for Japan's long experiment in fiscal accommodation," said Innes. "It's not just about leadership, it's about liquidity."

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Japan's Nikkei 225 index JP:NIK rallied 4.75% on Monday, its biggest percentage gain since April 10, to close at a record high, according to Dow Jones Market Data. The index finished the trading session with a year-to-date gain of 20.2%.

Takaichi is "considered to be very dovish, pushing for more spending, tax relief and lower interest rates," said Louis Navellier, chief investment officer of Navellier & Associates Inc., in emailed comments Monday.

So far this year, the WisdomTree Japan Hedged Equity Fund has surged almost 21% through Monday, while the iShares MSCI Japan ETF has rallied about 24% and the JPMorgan BetaBuilders Japan ETF has soared around 25%, according to FactSet data. Those gains far exceed the U.S. stock market's rally this year, with the S&P 500 SPX up 14.6% through Monday.

"Investors believe Takaichi - an advocate of looser fiscal and monetary policy in the mould of Shinzo Abe's 'Abenomics' - could seek to unleash fresh government stimulus while pressing the Bank of Japan to pause its tightening," said Karl Schamotta, chief market strategist at Corpay Cross-Border Solutions, in a note Monday.

-Christine Idzelis

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10-06-25 1633ET