Politics Rock the Markets

October 06, 2025

Elias Haddad

Sanae Takaichi set to become Japan’s prime minister. Takaichi’s pro-stimulus agenda knocked JPY lower, lifted Japanese stocks, and steepened the yield curve.

France’s new prime minister resigned this morning. French bonds, stocks, and EUR plunge.

Check-out our Drivers for the Week for a look at what markets are facing this week.

USD is up reflecting JPY and EUR weakness. No US economic data is due today. Kansas City Fed President Jeff Schmid (2025 FOMC voter) speaks on the economic outlook and monetary policy (5:00pm London, 12:00pm New York).

JAPAN

Sanae Takaichi was elected leader of Japan's ruling Liberal Democratic Party (LDP), putting her on course to become the country's first female prime minister once parliament confirms her appointment on October 15.

Japan’s financial market reaction reflected Takaichi’s pro-stimulus fiscal and monetary agenda. The Nikkei rallied 5% to a record high. USD/JPY surged 2% to near 150.44, with the next two resistance levels offered at 150.92 (August 1 high) and 151.30 March double-top). Japan’s yield curve steepened sharply as 2-year government bond yield fell as much as 6bps while 30-year bond yield rose 14bps. The swaps market slashed Bank of Japan (BOJ) October 30 rate hike bets from roughly 60% to 25%.

Takaichi has consistently advocated for expansionary fiscal policy, calling for increased government spending, tax cuts, and cash support for households, funded if needed by new bond issuance. She also criticized BOJ’s interest rate hikes. Nonetheless, Takaichi will face significant constraints to push ahead with her fiscally profligate pledges as the LDP does not have majorities in both bouses of parliament.

Meanwhile, we are sticking to our view that the BOJ will resume normalizing rates at the upcoming October meeting. Japan’s Tankan business survey points to an ongoing recovery in real GDP growth and underlying inflation is making good progress towards the BOJ’s 2% target. Bottom line: we would lean against USD/JPY overshoot above 151.00 given that USD/JPY is trading well-above the level implied by US-Japan 2-year bond yield spreads.

EUROZONE

France’s political crisis deepened. Prime minister Sébastien Lecornu resigned this morning, less than 24hrs after naming his new government and after less than four weeks in office. Lecornu’s resignation means President Emmanuel Macron, who plans to serve his full term until May 2027, must choose between appointing a sixth prime minister in less than two years or call a new parliamentary election. Appointing a new prime minister won’t solve the pattern of rapid government changes. The National Assembly is deeply divided, with no single party holding a clear majority.

French OAT-German Bund yield spreads widened to 87bps, the highest since December 2024. Still, France’s political turmoil remains country-specific and not systemic as Eurozone periphery bond yields spreads to Germany are contained. We expect EUR/USD to hold above its 100-day moving average (1.1622). If this level gives way, the next support is offered at 1.1575.

ECB President Christine Lagarde speaks later today (1:00pm London, 8:00am New York). Last week Lagarde signaled again that the ECB is pretty much done easing noting that “We are in a good place and we have to make sure that we stay in that good place.” Bottom line: ECB/Fed policy stance continues to underpin the uptrend in EUR/USD.

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