Kato's Potential Victory Could Weaken Yen, Steepen Bond Yields

As the October 4th Liberal Democratic Party presidential election approaches, the policy stances and market impacts of the five candidates have become a focal point for investors. The candidates include Teiwa, Koyama, Hayashi, Kato, and Kono. The candidates' positions on tax, monetary, and fiscal policies are notably divergent, with Kato being seen as the most likely to cause significant market volatility.

Kato's victory would have the most substantial impact on the yen and Japanese government bond markets. While she no longer explicitly advocates for reducing the consumption tax, she continues to prioritize the debt-to-GDP ratio over strict fiscal discipline. This stance could lead to market expectations of fiscal expansion. Additionally, the market perceives her as favoring a loose monetary policy. If Kato wins, the yen could weaken, and the Japanese government bond yield curve could steepen.

In contrast, Kono and Hayashi's victories would likely maintain the continuity of the current policies. Kono is the only candidate who has not ruled out reducing the consumption tax, and his victory could strengthen the yen. All candidates have expressed support for abolishing the temporary gasoline tax, aligning with the agreement between the ruling and opposition parties.

In terms of industrial and energy policies, all candidates support investment in growing sectors such as artificial intelligence and semiconductors, the restart of nuclear power plants, and the strengthening of Japan's defense capabilities. These policies are largely consistent with the economic and fiscal management and reform basic policy 2025 approved by the Kono cabinet in June.

Regarding the Bank of Japan's monetary policy, Teiwa, Koyama, Hayashi, and Kono have indirectly expressed support for gradual interest rate hikes. Notably, Kato, who opposed rate hikes in the 2024 presidential election, has not made a clear statement on the issue this time.

All candidates have indicated that they will seek cooperation with the opposition or expand the ruling coalition. Currently, no candidate has mentioned dissolving the House of Representatives to hold a general election in the near future. Over the next two weeks, multiple public debates and policy speeches will be held in Tokyo, Nagoya, Osaka, and other cities. Party member voting will end on October 3, with the official election taking place on October 4.

In summary, the upcoming Liberal Democratic Party presidential election is expected to have significant implications for Japan's economic policies and market dynamics. The divergent stances of the candidates on key issues such as tax, monetary, and fiscal policies will shape the market's response and the direction of Japan's economic future. Investors are closely monitoring the developments as the election date approaches, with Kato's potential victory being seen as the most significant variable for the market.