Takaichi's Leadership and the Future of BOJ Policy: Navigating Political Delays in Japanese Asset Allocation

The political landscape in Japan has introduced a new layer of complexity to the Bank of Japan's (BOJ) monetary policy trajectory. With Sanae Takaichi's emergence as a leading contender for the Liberal Democratic Party (LDP) leadership-and her likely path to becoming Japan's first female prime minister-the central bank's plans for rate hikes in 2025 face significant delays. Takaichi's advocacy for expansionary fiscal and monetary policies, reminiscent of the "Abenomics" era, has shifted investor expectations, reshaping asset allocation strategies across equities, bonds, and real estate. This analysis explores how political delays in BOJ rate hikes under Takaichi's influence are altering foreign investor positioning and the broader implications for Japan's financial markets.

The BOJ's Tightening Trajectory Under Political Pressure

The BOJ has already begun reversing its ultra-loose monetary stance, raising the policy rate to 0.5% in January 2025. However, Takaichi's leadership has introduced uncertainty. As a proponent of demand-driven inflation and fiscal stimulus, she has urged the BOJ to maintain accommodative conditions, delaying the anticipated October 2025 rate hike, according to Reuters. According to Reuters, this pause is unlikely to derail the central bank's long-term tightening path, with markets pricing in a hike by early 2026 if global uncertainties remain manageable.

Political pressures are compounded by external factors, including U.S.-Japan diplomatic tensions over currency levels and the potential impact of President Trump's visit to Japan. These dynamics suggest that the BOJ may adopt a more cautious approach, prioritizing economic growth over aggressive tightening, Reuters noted.

Foreign Investor Behavior: Bonds, Equities, and Real Estate

Bonds: Foreign investor positioning in Japanese Government Bonds (JGBs) has shifted dramatically. In the week through September 27, 2025, foreign investors sold a net ¥2 trillion ($13.6 billion) of long-term JGBs, marking the largest weekly outflow in a year, Moderndiplomacy reported. This selloff coincided with a rise in 10-year JGB yields to 1.665%, the highest level since 2008, as markets priced in the likelihood of a BOJ rate hike. Takaichi's pro-stimulus stance, however, could push bond yields higher in the long term due to increased fiscal spending and bond issuance, according to Bloomberg.

Equities: Japanese equities have experienced mixed signals. While the Nikkei 225 index rose 11% since July 2025, driven by corporate reforms and a gradual return of foreign capital, recent weeks have seen a three-week selling streak in foreign investor inflows, Lombard Odier noted. By late September, foreign investors sold ¥963.3 billion in Japanese stocks, reflecting caution amid political and policy uncertainties, according to Moderndiplomacy. Takaichi's pro-Abenomics approach, however, is expected to support equities in the long term, particularly in sectors benefiting from fiscal stimulus, the Bloomberg piece argued.

Real Estate: The real estate sector remains resilient despite rising interest rates. Core urban areas like Tokyo and Osaka have seen housing prices grow by over 8% annually in early 2025, as reported in a Wa-Mare column. However, foreign investors are adopting a wait-and-see approach, monitoring the BOJ's policy and yen movements before committing capital, the column noted. The shift from ultra-low interest rates to 0.5% has also prompted a reevaluation of risk-return profiles, with a focus on location fundamentals and rental income, the Wa-Mare column observed.

Currency Dynamics and Hedging Strategies

The yen has weakened against the U.S. dollar, with the dollar pushing above ¥150 in late 2025, according to Reuters. This depreciation is partly attributed to Takaichi's dovish stance and the BOJ's delayed rate hikes, which reduce the yen's appeal as a carry trade asset. Foreign investors are increasingly using hedging mechanisms, such as yen basis swaps, to manage currency risk. A report by The Japan Times notes that hedging costs have declined, reflecting reduced concerns about a sharp yen rebound.

Data Visualization and Market Outlook

The interplay between political delays in BOJ rate hikes and foreign investor behavior underscores a fragile equilibrium. While Takaichi's leadership may prolong accommodative conditions, the central bank's commitment to gradual normalization remains intact. Analysts like Richard Kaye of Comgest Asset Management anticipate a long-term boost for Japanese equities, driven by economic reforms and trade relations, as noted in the Bloomberg coverage. However, the path forward hinges on resolving political uncertainties and managing global inflationary pressures.

Conclusion

Takaichi's leadership introduces a dual narrative: a short-term delay in BOJ rate hikes and a long-term shift toward fiscal stimulus. Foreign investors are recalibrating their portfolios, with outflows in bonds and equities reflecting caution, while real estate and equities remain attractive in the medium term. As the BOJ navigates this complex landscape, the coming months will be critical in determining whether Japan's financial markets stabilize or face renewed volatility.