11:24 AM EDT, 10/22/2025 (MT Newswires) -- The 30-year Japanese government bond yield remains nearly 25bps below the intra-day high set following Sanae Takaichi's LDP leadership election victory and this stability at lower yields, while partly explained by international factors as well, does suggest the initial fears over Takaichi's policies are receding, said MUFG.

Following the coalition agreement with Ishin, a policy document including economic measures that will likely be included in an upcoming fiscal spending package was released. Abolishing the provisional gasoline tax rate and including subsidies on electricity and natural gas charges are set to be part of the initial fiscal steps taken to help reduce the cost-of-living burden on Japanese households, wrote the bank in a note.

An exemption of the sales tax on food until March 2027 will also help lower inflation. These measures, along with the review of a basic income tax reduction only "in accordance with the progress of inflation," suggest the focus will be targeted and on easing inflation. Straight cash transfers to households will be scrapped.

Economic Policy & Revitalisation Minister Minori Kiuchi also spoke on Wednesday on Bank of Japan policy, stating that growth and price stability were the goals and that the BoJ was expected to manage policy consistent with achieving the 2.0% policy goal. Takachi on Tuesday stated that the current cooperation agreement between the government and the BoJ doesn't need to be altered at this stage, suggesting no shift in broad government policy on BoJ policy management, stated MUFG.

So the bank's sense at this stage is that there are greater signs of policy continuity than was originally feared and as such the 'Takaichi trade' of selling JGBs and the yen (JPY) may be peaking. That's not to say that the yen is about to rebound and take out the yen weakness in response to Takaichi's victory, but more that the policy approach being more balanced will deter further yen selling.

The victory of Takaichi has had an impact on BoJ policy -- a rate hike was much more likely in October prior and the timing has been pushed back to at least December or January, added MUFG.

The one risk to this view is that the new administration is only being cautious ahead of President Donald Trump's visit to Japan next week, according to the bank. PM Takaichi doesn't want a plunging yen to the backdrop of that visit and financial market stability is desirable.

In addition, Trump is likely to pressure Takaichi to lift defense spending further. Japan spent just 1.4% of gross domestic product on defense in 2024-25, with a commitment to spend 2% of GDP by March 2028. The U.S. wants its allies to lift defense spending to 5% of GDP.

But overall, the political risk premium in the yen now looks appropriate -- the yen is by far the worst performing G10 currency in October at 2.5% down -- and if risk-off conditions were to intensify and/or the U.S. employment data, when it comes, was to signal the need for more Federal Reserve easing, it would likely help turn the USD/JPY momentum to the downside.