Japan’s stock market will likely get support while the yen and long-term government bonds come under pressure following the surprise victory of pro-stimulus Sanae Takaichi in the Liberal Democratic Party's leadership election.

That’s the view from investors and strategists including Pepperstone Group and Nomura Securities, who expect the yield curve to steepen. The ascent of Takaichi, a proponent of easy fiscal and monetary policy, will likely raise concern over rising bond supplies while reducing expectations of a Bank of Japan rate hike later this month.

This was "very much a surprise result” and not the one that markets had been discounting, said Michael Brown, a senior research strategist at Pepperstone. Takaichi’s win is "likely to be yen negative, on the dovish BOJ repricing, coupled with a steeper JGB curve given her looser fiscal views, though both of those combined should be a boost for the Nikkei.”

Takaichi is expected to become Japan’s first female prime minister later this month in a parliamentary vote after winning the leadership contest Saturday. Investors had expected the seat to go to political scion Shinjiro Koizumi, who was seen as taking a more fiscally cautious view while leaving the BOJ to press ahead with normalization.

Bank stocks will likely struggle on expectations rate hikes will be pushed back, while domestic demand and small-cap shares may get a "significant tailwind” in the short term, said Richard Kaye, co-head of Japan equity strategy at Comgest Asset Management. Market participants, including foreign investors, would welcome any signs of a move toward Abenomics, he said, a reference to the economic policies of late former Prime Minister Shinzo Abe.

A protege of Abe, Takaichi has prompted views that her leadership will move the country back toward Abenomics. She has pushed for cash handouts and tax rebates to help households struggling with inflation, and has been the boldest among LDP candidates in saying that extra bond issuance may be needed.

Bond investors had been wary of fiscal spending even before Takaichi’s win, with opposition parties calling for tax cuts. Coupled with speculation over BOJ rate hikes, 10-year yields have hovered around their highest levels since 2008. That’s helped push the yen stronger against the dollar over the past week, while the Nikkei 225 refreshed its all-time high, helped by a global tech rally.

Takaichi’s unexpected win will revive a trade "characterized by a weaker yen, higher stock prices and a steeper yield curve,” said Mari Iwashita, executive rates strategist at Nomura Securities. With market expectations for an October rate likely to fall, "the BOJ is unlikely to deliberately proceed with a rate increase.”

To be sure, any potential yen weakness from Takaichi’s win may be limited due to narrowing Japan-U.S. interest rate differentials, said Rong Ren Goh, fixed income portfolio manager at Eastspring Investments. The outlook for the U.S. Federal Reserve’s trajectory remains uncertain, he said.

As her party no longer holds a majority in either house of parliament, Takaichi may face challenges in pushing her domestic agenda. She may also face an early diplomatic test, as U.S. President Donald Trump is expected to visit Japan later this month, according to reports.

In the mid- to long-term, Comgest’s Kaye is optimistic about the outlook for Japan’s stock market.

"A shift in perception toward Japan will become a driver,” said Kaye. "New approaches are expected to emerge in deregulation for economic growth, monetary policy and Japan-U.S. trade. This represents a significant opportunity for Japan and may mark a turning point.”