Japanese lawmakers will likely vote today, in an extraordinary Diet session, to confirm newly elected Liberal Democratic Party (LD) leader Sanae Takaichi as the country’s first female prime minister. Markets have tempered their initial expectations for aggressive fiscal stimulus under her leadership. The LDP’s new coalition partner, the Japan Innovation Party (Inshin), has pushed for politically sensitive reforms such as a 10% reduction in the number of lawmakers, a two-year suspension of the 10% consumption tax on food, and a ban on corporate and organizational donations to political parties, that put it at odds with other LDP factions. While a coalition agreement was signed to secure Takaichi’s premiership in any run-off, it reflects compromises and potential future conflicts. The opposition led by the Constitutional Democratic Party is expected to scrutinize and resist fiscal proposals that appear to favour corporates over households.
Thus, Takaichi faces significant headwinds in reviving Abenomics-style policies. Unlike former Pime Minister Shinzo Abe, who enjoyed a strong mandate to end deflation, Takaichi faces a frustrated electorate grappling with a rising cost of living, which has stripped the former LDP-Komeito coalition of its majority in both the upper and lower houses.
Meanwhile, the Bank of Japan may reaffirm that the JPY’s weakness is becoming problematic for households and small firms through higher import costs. The October 2025 Tankan survey showed firms continuing to pass on rising input prices. On October 24, consensus expects National CPI inflation to increase to 2.9% YoY in September from 2.7% in August. Given the prolonged period of inflation above the 2% target, some BOJ board members have called for another rate hike. While the BOJ is likely to keep rates unchanged at its October 30 meeting, it may pave the way for a hike in December by highlighting wage-driven inflation and revising its growth and inflation forecasts higher. The prospect of a BOJ hike vs. a Fed cut in December could eventually pull USD/JPY lower into a 146-149 range again.
We expect a range of 1.16-1.18 for EUR/USD amid mixed policy and political drivers. The USD remains soft after Fed Chair Jerome Powell’s signalled that the subsequent FOMC meetings will prioritize US labour market weakness over temporary tariff-led inflation when cutting rates. Hence, the delayed US CPI report on October 24 will likely carry less weight, even though consensus expects CPI inflation to increase to 3.1% YoY in September from 2.9%.
In contrast, the European Central Bank is expected to keep rates unchanged at its October 30 governing council meeting, believing that the Eurozone economy and monetary policy are in a good place. S&P Global Ratings’ surprise downgrade of France’s sovereign debt rating to A+ from AA- on October 17 should have limited impact on the euro. Prime Minister Sebastien Lecornu’s government survived two no-confidence votes last week and kicked off the Budget 2026 debate in the fragmented parliament, easing immediate fiscal fears in the bloc’s second largest economy.
Quote of the Day
“Part of the job of economics is weeding out errors. That is much harder than making them, but also more fun.”
Robert Solow
October 21 in history
The Nobel Prize in Economics was awarded to Robert Solow for his theory of economic growth in 1987.
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