It has been another week where political headlines have dominated financial markets, but the outcomes have been positive if multiple all-time highs across equity indices in the US, UK, Europe and Japan are a guide.
We’ll start with Japan and the surprising outcome from the Liberal Democratic Party leadership election last weekend. Takaichi Sanae was elected as leader and is the de-facto new Prime Minister. The Nikkei index surged over 5% on Monday to a new all-time high on the belief Ms Takaichi will increase spending and push for looser monetary policy. Ahead of the weekend vote, Shinjiro Koizumi was the narrow favourite to win the contest, but he lost by 185 votes to 156 in a run off vote on Saturday. Takaichi has previously held multiple cabinet positions and was a big supporter of former Prime Minister Shinzo Abe’s ‘Abenomics’ policies. Takaichi will now need a simple majority of votes in Parliament in a session scheduled for 15 October to be confirmed as Prime Minister. The LDP has a minority in Parliament but maintains a hold on power through coalition with the smaller Komeito party. Ahead of the vote, the leader of the Komeito party, Tetsuo Saito, said his party would not remain in a coalition with the LDP if it was led by Takaichi, who is seen as a nationalist who favours tight controls on immigration, and increasing spending including on defence.
Takaichi told the party all workers must now “work like horses… for my part I will be abandoning the concept of work-life balance… Work! Work! Work! Work! Work!” Takaichi is expected to be able to take the role of Prime Minister as it would appear there are other like-minded parties ready to join the coalition in some form to approve Takaichi in the vote next week. Takaichi will need to build bridges with parties such as Nippon Ishin and DPFP who are reasonably aligned with the LDP. Even before the leadership election Takaichi had begun to tone down some of her rhetoric, potentially mindful of not alienating other parties whose support she will need. As a result of the leadership election, the Japanese Yen weakened notably on expectations that the Bank of Japan would be in less of a hurry to raise rates under a Prime Minister who has made clear her views that monetary policy should remain relatively loose. Japanese bond yields moved higher, on expectations her more fiscally stimulative agenda would increase inflation over the longer term.
So, is this a return to Abenomics+ – the policies of former Prime Minister – the late Shinzo Abe, who Takaichi worked closely with in government? Abenomics had three ‘arrows’ – monetary easing, fiscal stimulus and structural reforms. Japan is not the same as it was in 2012 when Abe took power, and more importantly, Takaichi is overseeing a minority government reliant on collation partners, meaning significant policy changes will be tougher to achieve. Takaichi already softened her tone on stimulative spending during the campaign, and monetary easing is not necessary given the inflation backdrop. But the ‘third arrow’ around reforms still leaves plenty of scope to carry on unfinished business from the Abe era, including labour market reform and encouraging female workforce participation, deregulation in agriculture, healthcare and energy and corporate governance improvements. Provided Takaichi can find a level of support in parliament to avoid policy gridlock, then she can potentially make some progress with Abenomics 2.0.
Now, let’s move on to France, where we have witnessed another turbulent week in politics as a result of the resignation of Prime Minister Sebastien Lecornu. Monsieur Lecornu resigned as Prime Minister on Monday morning after less than a month in the job and just hours after appointing a new cabinet. Lecornu blamed “partisan appetites” from all sides and the lack of a culture of compromise for the stalemate. The pressure on Lecornu had intensified after the unveiling of his cabinet on Sunday night in which most of the incumbent ministers from the former administration of Francois Bayrou remained in place. Lecornu had previously promised a “rupture” with the outgoing government. Opposition parties immediately threatened a confidence vote as early as this week and the government’s centre right coalition partners also threatened to quit. French President Emmanuel Macron asked Sebastien Lecornu to work with other political parties to “define a platform for action and stability for the country” by the end of Wednesday. On Wednesday Lecornu told France Televisions that he expects President Emmanuel Macron to name his replacement within 48 hours in the aftermath of the last-ditch talks with other political parties to back a new government. Lecornu said the “prospect of dissolving parliament and triggering snap elections was receding” and that while the process of reaching a consensus on passing a 2026 budget is “difficult”, “I feel a path is possible”. Lecornu noted that an “absolute majority” of forces in parliament were in agreement on avoiding snap elections. French politics remains in a difficult place given the three-way split in parliament and a lack of agreement or desire to address the fiscal deficit or the debt trajectory. Indeed, the common ground found between the parties is more around reversing some of the pension reforms designed to address some of the debt concerns, President Macron may well name a new Prime Minister before the end of today (Friday), but it still appears a stopgap until fresh elections are run, or indeed the Presidential election comes round in 2027. There is no appetite from Macron or others for fresh elections that would likely see significant gains for the National Rally party of Marine Le Pen. French bond spreads over German Bunds came close to the levels last seen in 2012 during the sovereign debt crisis, and French equities saw some underperformance during the week.
Talking of political gridlock, the US government remains shutdown as Republicans and Democrats – in public at least – continue to show no signs of willingness to compromise. Democratic Senate Majority Leader Chuck Schumer said their position on (the extension of) healthcare subsidies remained unchanged, while Republican Senate Majority Leader John Thune suggested a process of individual bills to reopen the government on a department-by-department basis. This isa process that would take a significant amount of legislative time, and one that has not gone down well with Speaker Mike Johnson. Prediction markets are now suggesting the shutdown will endure for the whole of this month. President Trump said he is considering blocking back pay for some federal workers when the US government reopens, saying “there are some people that really don’t deserve to be taken care of”. The White House Budget Office has drafted a memo arguing the Government Fair Treatment Act of 2019 is deficient and that furloughed employees can be paid only if the bill that ends the shutdown explicitly sets out funds for that purpose. Financial markets continue to disregard the shutdown, though the absence of government published economic data will become increasingly frustrating as the days roll by.
Source: Columbia Threadneedle Investments as at 10 October 2025.
