The Revolving Doors Turn Again

Spare a thought, if you will, for poor Japan. It has been trying to reclaim the “revolving door” mantle after several years of government stability, but France keeps trying to steal its thunder. Last month, both countries’ revolving doors turned the same day, with two prime ministers (PMs) resigning. Now they are both at it again, with yet another French PM resigning just as Japan welcomes the ruling Liberal Democratic Party’s (LDP’s) new leader as PM-to-be. Unsurprisingly, headlines claim both are monumental events for markets. Some perspective, as ever, is in order.

Not Exactly a Revolution in France

Just 27 days after getting tapped as French PM, Sébastien Lecornu resigned Monday, citing irreconcilable differences with the other party leaders in the National Assembly. This sets France up to get its third PM in under a year.^[i] And with no end in sight to the ongoing 2026 budget standoff, headlines warn a financial crisis is nigh. Spiking long-term government bond yields, allegedly, are the proof.

Our advice: Breathe. Yes, French bond yields rose Monday. But so did yields globally. As we write, 10-year French OATs yield 3.57%, tame by historical standards.^[ii] This looks more to us like normal, sentiment-induced volatility. Perhaps elevated political uncertainty is magnifying wiggles in France. But people’s feelings about debt and politics often don’t match reality.

In France, reality is simple: Government debt remains affordable, no matter how you slice it or who is measuring. Outlets’ estimates and methods vary, but we zeroed in on central government interest payments as a percentage of government tax revenues (excluding social contributions). In 2024, interest took 13% of tax revenue, up from 8% in 2020 but below most of the 1990s and 2000s.^[iii] (Insee, France’s national statistics office, projects it ticking down this year.) There was no debt crisis then.

So we think French debt remains a false fear for bond and stock markets, a bull market “wall of worry” brick. However, the political uncertainty is real and rising. That is usually a headwind and may be so for France, at least for now. We doubt this has a lasting negative effect, but it could weigh on relative returns for a spell.

In time, investors will get clarity, but now there are only questions. Lecornu became PM when François Bayrou lost a confidence vote last month after failing to win budget support from splintered opposition parties. When President Emmanuel Macron picked Lecornu to replace him, the scuttlebutt said Lecornu had warmer relations with the populist National Rally leadership, which might pave the way for a deal. But all went ice cold when he unveiled his cabinet, a centrist hodgepodge of names the opposition on the left and right found too familiar. They complained, Lecornu complained about their complaining, and off he went. Macron has yet to make a public statement, but late Monday, French media reported he asked Lecornu to head emergency talks with opposition leaders and hash out a budget agreement by Wednesday. Given he accepted Lecornu’s resignation, it is unclear whether this is an attempt to save his premiership. And if the last-ditch talks fail, Macron will “face up to his responsibilities,” whatever that means.^[iv]

So France is back at a familiar impasse, with one of three general outcomes possible, presuming Lecornu’s resignation goes through.

1. Macron can appoint a new PM.
2. Macron can call a snap legislative election.
3. Macron can resign.

This looks impossible to forecast, as do the offshoots of each main avenue. Failure to pass a budget, under Lecornu or a new PM, could bring a partial government shutdown. A snap election could return another hung parliament, with more gridlock and bickering. Macron’s resignation would prompt an early presidential election (currently due in 2027), and the winner could call a legislative election. There are a lot of permutations, and that is before we get to things like partisan polls and investors’ fears of the National Rally and leftist France Unbowed. 

So there is a lot of fog. Maybe it will start to clear when Macron makes his first public comments on the situation. Maybe not. Our broader view that all this instability shrouds gridlock remains intact, as does our longstanding observation that gridlock is fine for markets. But uncertainty can counteract that in the short term, so we think measured expectations are in order. The sky isn’t falling. But it may take a while to clear.

Is Japan Ready to Rock and Roll?

Meanwhile, Japan is enjoying falling uncertainty. The ruling Liberal Democratic Party (LDP) announced Sanae Takaichi as winner of its leadership contest, setting her up to be Japan’s new PM once the Diet confirms her. She will be Japan’s first female PM—and the first who was also once a heavy metal drummer, which we will never get tired of.

As for markets, one prominent headline made us do a double take, stating Takaichi received a “volatile greeting from markets.”^[v] That is an odd way to describe the TOPIX jumping 3.1% in yen Monday.^[vi] But volatility cuts both ways, and the yen weakened, so we guess it is accurate.

We also think this smacks of sentiment, not markets shouting that this new government is wildly bullish. To us, it seems tied to perceptions and feelings. Takaichi’s main competition, Agricultural Minister Shinjiro Koizumi, campaigned on reining in deficits—austerity. Takaichi, a protégé of the late Shinzo Abe, touted more pro-growth rhetoric and “neo-Abenomics,” referring to her predecessor’s “three arrows” of a monetary stimulus, fiscal stimulus and economic reform. She campaigned on public investment, tax cuts and low interest rates, though she later stressed that monetary policy is independent. Regardless, the knee-jerk reaction seemingly priced in a weaker currency boosting Japanese multinationals’ export earnings (not that a weak yen assuredly does this).

Here, too, we suggest keeping tame expectations. The LDP and its coalition partner, Komeito, lack a majority in both houses, which means gridlock. While the small opposition Japan Innovation Party (JIP) recently held coalition talks, that was based on its leaders’ expectation that Koizumi would win, creating common ground on spending cuts. When Takaichi won, the JIP shifted to “wait and see.” The Constitutional Democratic Party of Japan (CDPJ) doesn’t seem keen, either, likely preferring to continue building popularity in hopes of winning in 2028. There is no mandate for big economic reforms.

So the status quo likely continues. The days of Abe and former BoJ Governor Haruhiko Kuroda collaborating on fiscal and monetary policy seem long gone. Current Governor Kazuo Ueda has been steering his own ship, stressing independent, data-driven monetary policy. (And anyway, the weak yen isn’t inherently bullish.) Takaichi may win legislative support for some initiatives, but sweeping change seems unlikely. This gridlock has been fine for Japanese stocks and probably stays that way. When a government can’t do much, legislative risk stays low, letting businesses and investors do their thing. Low political uncertainty should be a fine tailwind.