ISTANBUL

After Japan re-elected Sanae Takaichi as the premier in a landslide victory during a snap election on Feb. 8, the conservative leader is expected to follow economic stimulus and expansionary fiscal policies, following in the footsteps of her mentor, Shinzo Abe, which may hinder the tightening efforts of the Bank of Japan (BoJ).

The markets enjoyed some growth-oriented optimism after Takaichi’s snap election gamble, but the situation raised some questions over the future of Japan’s monetary policy.

Takaichi is focused on massive public spending and expansionary fiscal stimulus, which could complicate the BoJ’s rate-hike path and its strategy to combat inflation.

The Takaichi government plans to make significant public investments in strategic areas, including defense, artificial intelligence (AI), and semiconductors. However, this is expected to stoke inflationary pressures, narrowing the BoJ’s room for maneuver in monetary and fiscal policy.

Makbule Deniz, assistant supervisor of strategy and investment at Istanbul-based brokerage firm Yatirim Finansman, told Anadolu the BoJ is facing a “challenging situation.”

Deniz stated that the BoJ’s statements in the coming months, as well as economic data, need to be monitored in the coming period, and that the BoJ’s actions and inflation estimates determine bond yields, as Japanese bonds have an outreach beyond the country’s borders due to its major role in global capital flows in the nation.

“Unless the BoJ moves towards faster rate hikes, the weakness in bonds and the Japanese yen may continue,” she said. “Growth-oriented expansionary policies are expected to support stock markets, and in the long term, rising inflation expectations may push bond yields higher while weakening the yen against the US dollar, but it’s possible that the dollar/yen exchange rate will gain and reverse direction in the second half of the year with interest rate differentials beginning to narrow and in line with rate hikes.”

“Despite Takaichi’s call for snap elections last month shaking global markets and triggering massive sell-offs in government bonds, the premier’s conciliatory statements over pursuing a sustainable and responsible fiscal policy brought about some normalization in the markets,” she added.

Deniz stated that Takaichi’s economic path prioritizes “economic security, including cybersecurity, supply chains, and critical minerals,” noting that the rise in public spending could focus on potentially more beneficial sectors like defense, nuclear energy, chips, and AI, but the yen’s weakening due to expectations may also push exporters to the forefront.

“The Nikkei 225 has gained over 10% since the beginning of this year, while risk appetite is expected to rise in certain sectors—defense, nuclear energy, chips, and AI are among those with the potential to lead this rally in the index,” she said.

“The yen, having lost 6% since Takaichi took over the Liberal Democratic Party (LDP) in October 2025, is trading at 159–160 levels, while overnight index swaps show an increased possibility that the BoJ will be hiking its rates in April, while estimates indicate the bank will hike rates twice this year,” she added.⁠

*Writing by Emir Yildirim in Istanbul