Japan's Nikkei hits record after fiscal dove Takaichi's election win

By Junko Fujita and Rocky Swift TOKYO (Reuters) -Japan's Nikkei share gauge surged past the 47,000 level for the first time on Monday after fiscal dove Sanae Takaichi was elected to lead the ruling party and become the next prime minister. The Nikkei 225 Index surged 3.9% to 47,566.84, after earlier passing the 46,000 for the first time ever. The broader Topix gauge was up 2.3%. The yield on the two-year Japanese government bond fell 4 basis points (bps) to 0.9%, reflecting expectations of later rate hikes by the Bank of Japan. The yen slid more than 1% against the dollar and euro. Takaichi was considered to have the most expansionist fiscal and monetary agenda among five candidates in the Liberal Democratic Party race to replace hawkish Prime Minister Shigeru Ishiba. "The Nikkei was on course to reach as high as 48,000 by year-end, but because Takaichi was chosen as the LDP leader, it shot up toward that level already," said Hitoshi Asaoka, the chief strategist at Asset Management One. "The market welcomes her spending policy, but whether she can achieve that goal is not certain, as the LDP is still a minority party. The Nikkei may retreat once before year-end." Takaichi began eyeing cabinet posts on Monday, with media reporting she planned to install former defence minister Minoru Kihara as chief cabinet secretary and bring back ex-foreign minister Toshimitsu Motegi as the country's top diplomat. Her pick for finance minister, which will be closely watched by investors, was unclear. In the lead-up to the LDP race, a "Takaichi trade" emerged – long on stocks and bearish on Japanese government bonds, particularly longer maturities – positioning for a win by the veteran lawmaker who is a devotee of the "Abenomics" stimulus policies of the late Shinzo Abe. In recent weeks, yields on two-, five-, and 10-year JGBs have all reached levels not seen since the financial crisis in 2008 on bets the BOJ could raise rates as early as this month's meeting. But those expectations are now being unwound. The yen swaps market on Monday indicated a 41% likelihood of a rate hike by December, down from 68% on Friday. The Topix Banks index slumped 2%, the only decliner among 33 industry groups, on expectations for lower lending margins if the central bank delays rate increases. Mitsubishi Heavy Industries, a major defence contractor, jumped 13% on expectations of more military spending under a Takaichi administration.   The yield on the 40-year JGB, the longest tenor, soared 14 bps to 3.52%. Yields on long-term debt are facing upward pressure on expectations Takaichi will push for more deficit spending, adding to concerns about Japan's creditworthiness. After her LDP victory, Takaichi told a press conference the government and central bank must work closely to ensure Japan's economy achieves demand-driven inflation backed by rising wages and corporate profits. (Reporting by Junko Fujita and Rocky Swift; Editing by Sam Holmes)

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