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Market outlook after LDP election amid lingering speculation of early rate hike
Long-term and super-long-term JGB yield scenario for October 6-10
Developments in long- and super-long-term JGB yields this week will hinge on the result of the LDP leadership election on October 4.According to various polls released this week, the LDP leadership contest is unlikely to be decided in the first round of voting, in which case the top two candidates will meet in a runoff. Surveys say Agriculture Minister Shinjiro Koizumiis likely to receive the most votes in the first round, with former Economic Security Minister Sanae Takaichi following closely behind and Chief Cabinet Secretary Yoshimasa Hayashi in third place. The market also appears to view Mr. Koizumi as the frontrunner. According to Nikkei QUICK’s September bond market survey(conducted on September 22-25), 75% of domestic bond investors anticipate a Koizumi victory, while 10% expect Ms. Takaichi to win and 14% see Mr. Hayashi coming out on top.
The expected market reaction is consistent with arguments we made in a September 9 Fixed Income Commentary report titled, "How will JGB curve respond to Ishiba's resignation announcement?" If a candidate perceived as favoring a disciplined fiscal stance is elected, we anticipate downward pressure on yields, particularly in the super-long sector. Conversely, upward pressure on yields --again centered on the super-long sector -- is likely if the LDP chooses a candidate viewed as supporting expansionary fiscal policy. Mr. Koizumi and Mr. Hayashi fall into the former category, while Ms. Takaichi belongs to the latter. As noted above, however, the market appears to have priced in a significant likelihood of a Koizumi victory, so yields might not decline meaningfully if he wins. In that case, the market would probably shift its focus to the assessment of subsequent policy and coalition-building negotiations between the ruling coalition and opposition parties. If Mr. Hayashi is elected, there may be some differences, such as a more cautious approach to enlarging the coalition*1, but we think the market’s reaction would be broadly similar. On the other hand, a Takaichi victory would likely come as a surprise, and although she appears to have softened her stance on fiscal expansion since announcing her candidacy, the initial reaction of the JGB market would probably be more pronounced.
One point to keep in mind is the ongoing market speculation regarding monetary policy. Next week brings a BoJ branch managers’ meeting on October 6, a speech by BoJ Governor Kazuo Ueda at the 2025 Paris Euro place Forum in Tokyo on October 8, and the release of the BoJ’s latest Opinion Survey on the General Public’s Views and Behavior on October 10. Speculation of an early rate hike is therefore likely to linger. The JGB curve twist-steepened just before the LDP leadership election last September as a result of the so-called Takaichi trade (buying medium- and long-term JGBs on expectations of a delayed rate hike and selling super-long JGBs on fiscal expansion concerns). But this time, shorter-term yields are unlikely to decline significantly even if Ms. Takaichi wins as long as rate hike speculation persists. On the other hand, a victory by Mr. Koizumi or Mr. Hayashi, who are seen as more likely to continue the Ishiba administration’s policies, might foster expectations that the government would accept further rate hikes. In that case, we would probably see some upward pressure on shorter-term yields. We have set our forecast ranges relatively wide, especially on the top end, in view of the above. We have also slightly raised (+5bp) the top end of our Oct-Dec 2025 forecast ranges for 30- and 40-year JGB yields in view of recent developments. See the “Market Forecast” at the end of this report for details.
*1. See Table 1 in our September 22Fixed Income Commentary(“Intriguing RV graphs: Heightening rate hike expectations, receding fiscal expansion concerns”)for details.