The Arms Race In The Indo-Pacific Is Just Getting Started As Participants Pick Sides

By Benjamin Picton, senior market strategist at Rabobank

US stocks rallied hard on Friday and the VIX index had its biggest one-day fall since April of last year. The rally broke three-straight days of losses where crypto was dumped and two-year Treasury bonds had tightened 19bps. Yields on two-year US treasuries rose almost 5bps on Friday to 3.50% in the broader risk-on rally.

Prime Minister Takaichi has won a landslide victory in Japan’s general election over the weekend. Takaichi’s Liberal Democratic Party now has a two-thirds supermajority in the lower house of the Diet, granting it the power to override the upper house.

The Nikkei is up 4.7% today and 12.9% YTD, trailing only the KOSPI among major Asian indices. Asian equity markets are mostly outperforming counterparts in Europe and the United States this year. The so-called ‘Takaichi-trade’ has seen Japanese equities well bid in reaction to Takaichi’s predilection for looser fiscal settings, greater investments in technology and defence, and pressure on the Bank of Japan not to raise interest rates too quickly.

Despite this cocktail of accommodative policy, USDJPY is dealing a little softer as Finance Minister Katayama indicated that she had been in close contact with US Treasury Secretary Bessent regarding stabilisation of the exchange rate. Katayama also said that she is prepared to take measures to stabilize markets today if necessary. 10-year JGBs are underperforming, with yields up 4.9bps on the day and the 2s10s curve steepening ~3bps.

Beyond the immediate implications for JGBs, the Japanese Yen and – by extension – the Yen carry trade, this is a momentous development geopolitically. Takaichi is a China hawk who sparked something of a diplomatic crisis late last year when she suggested that a Chinese invasion of Taiwan could be considered existential for Japan. That would be sufficient to justify intervention by the Japanese self-defence force under the country’s pacifist constitution – a point that was not lost on Chinese diplomats, who reacted furiously to the implication that Japan could resist efforts to reunify Taiwan with the mainland.

According to the reports that Australia has been quietly increasing tariffs on Chinese steel imports to protect what remains of its own domestic industry even as hopes for the conclusion of a long-awaited Tyler Durden Mon, 02/09/2026 – 10:40

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