Market Shift Ahead: How Japan's Political Change Could Reshape Japanese ETF Performance

On October 6, 2025, Japan’s Nikkei 225 index climbed over 4% to establish a fresh all-time record. This remarkable rally followed the Liberal Democratic Party’s selection of Sanae Takaichi as its new chairman—a decision that positions her to potentially become Japan’s first female prime minister. Market participants interpreted this leadership transition as signaling renewed appetite for expansionary fiscal measures and sustained accommodative monetary policy from the Bank of Japan.

Market Mechanics: What Drove the Surge

The gains were concentrated in real estate, technology, and consumer cyclical sectors. The underlying drivers tell an interesting story about how Japanese ETF investors should recalibrate their approach.

The 30-year Japanese government bond (JGB) witnessed a sharp decline, with yields hitting record territory. Meanwhile, shorter-dated instruments—specifically two-year notes—moved in the opposite direction, compressing yields amid speculation that the Bank of Japan might postpone rate increases. The yen weakened noticeably against the U.S. dollar and reached historic lows relative to the euro.

Understanding Takaichi’s Policy Framework

Among five candidates vying for the party leadership, Takaichi emerges as the most growth-oriented contender. She succeeds a predecessor known for hawkish policy preferences. According to market strategists, the magnitude of the Nikkei’s advance suggests investors had been pricing in a potential move toward 48,000 by year-end, but Takaichi’s victory accelerated this timeline substantially.

During her campaign, Takaichi outlined proposals to channel capital into emerging strategic domains: artificial intelligence infrastructure, semiconductor manufacturing, nuclear fusion technology, and defense capabilities. This agenda carries significant implications for sector rotation within Japanese equity markets.

Strategic ETF Positioning for the New Environment

Hedged Exposure to Japanese Large-Cap Equities

The depreciation of the yen presents a complex opportunity. While it enhances earnings power for export-dependent Japanese corporations—a natural tailwind for the Nikkei—it simultaneously strengthens the U.S. dollar against the yen. For foreign investors, this dynamic argues persuasively for currency-hedged vehicles.

Three candidates deserve consideration: WisdomTree Japan Hedged Equity Fund (DXJ), Xtrackers MSCI Japan Hedged Equity ETF (DBJP), and iShares Currency Hedged MSCI Japan ETF (HEWJ). On October 6, DXJ appreciated 2.8%.

Leveraging Currency Movements

The yen’s directional weakness creates natural opportunities in inverse yen positioning. ProShares UltraShort Yen (YCS) captured this momentum, advancing 3.8% during the same trading session. Conversely, the monetary policy outlook exerted downward pressure on traditional yen holdings. The Invesco CurrencyShares Japanese Yen Trust (FXY) declined 1.9% as traders reassessed their defensive currency positioning in light of dovish Bank of Japan expectations.

Takeaway for Japanese ETF Investors

The combination of policy pivot, currency weakness, and sector-specific tailwinds has reshaped the investment calculus for Japan-focused strategies. Whether through hedged equity exposure or tactical currency plays, the current environment offers meaningful opportunities across Japanese ETF categories.