Japanese markets await clarity on leadership

• Japanese equities hit record levels, but the situation is still uncertain given political disagreements.
   
• We expect more clarity in the coming weeks as parties decide on their nomination for the PM.
   
• Further rapid weakening in yen could prompt the BoJ to hike interest rates in October, while a data-dependent approach suggests otherwise. 
   

Japanese equities hit a new record in October following the election of pro-business Sanae Takaichi as the leader of Japan’s ruling political party (LDP). However, the dust hasn’t fully settled as the long-term coalition between LDP and its partner Komeito broke down on Friday. Markets were expecting that if confirmed as PM, Takaichi’s policies to increase government spending could boost the country’s economic growth. On the other hand, the yen weakened on worries that the push for higher spending could negatively affect the government’s financial situation.

On the economic front, while inflation is moderating, it remains above the BoJ’s target. Additionally, the Bank would like to stabilise the yen after its abrupt fall, and a rate hike in October may allow it to do that. The central bank will be monitoring the political situation and would like to minimise any damage to market sentiment from political uncertainty.

Most equity markets declined due to concerns over an escalation of a trade war between the US and China. Worries about an extended US government and speculation about the sustainability of the global equity rally also hurt sentiment. On a positive note, Japanese stocks rose. Bond yields generally declined. In commodities, oil prices fell following receding geopolitical tensions, but gold continued its ascent.
 

Equity and bond markets (chart)
Source: Bloomberg. Markets are represented by the following indices: World Equities = MSCI AC World Index (USD) United States = S&P 500 (USD), Europe = Europe Stoxx 600 (EUR), Japan = TOPIX (YEN), Emerging Markets = MSCI Emerging (USD), Global Aggregate = Bloomberg Global Aggregate USD Euro Aggregate = Bloomberg Euro Aggregate (EUR), Emerging = JPM EMBI Global Diversified (USD).

All indices are calculated on spot prices and are gross of fees and taxation.

Government bond yields (table), Commodities, FX and short-term rates.

Source: Bloomberg, data as of 10 October 2025. The chart shows the Nikkei 225 index.

¹Diversification does not guarantee a profit or protect against a loss.

Americas

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Europe

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Asia

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