The Prime Minister Sanae Takaichi’s landslide election victory in Japan has opened a new stage for the Japanese markets. The Liberal Democratic Party (LDP) has achieved a two-thirds ‘supermajority’ in the Lower House – the largest number of seats for a single party since the post-war -, giving the Government a firm mandate to execute its economic agenda and overcome legislative vetoes.
For experts, the result puts an end to years of political volatility and reinforces the visibility of economic policyalthough now the focus shifts to the fiscal and monetary decisions that will mark the direction of the Nikkei, the yen and the Japanese debt.
NIKKEI: THE ‘TAKAICHI TRADE’ RETURNS TO THE SCENE
The most immediate reaction has been that of equities. The Japanese market soared this Monday after the election result, with the Nikkei surpassing record levels in the heat of expectations of stimuli and policies favorable to growth. However, it is worth noting that, although it exceeded 57,000 points, it closed below that level. From Rabobank they highlight that these increases are supported both by the perspective of greater spending and by stock market reforms, the boost to sectors such as defense and technology and efforts to attract foreign investment and mobilize domestic savings towards the stock market. Neil Wilson emphasizes that the victory «paves the way for more economic stimulus, pro-growth policies and fiscal expansion», while Hisashi Arakawa, of Aberdeen Investments, believes that the victory provides the political space necessary to increase strategic investment in areas such as semiconductors, artificial intelligence or energy security.
Furthermore, the financial regulator studies revising the corporate governance code to encourage companies to use their excess cash, another potentially bullish factor for stocks.
YEN: INITIAL CALM, BUT WITH RISK OF WEAKNESS
The currency has reacted more moderately than expected to the victory. Although the market had associated Takaichi with expansionary policies—and therefore a weaker yen—the currency regained some ground against the dollar after the election. Rabobank points out that Nikkei strength could offer some support to the yenwhile Aberdeen anticipates that, in the medium term, fundamentals point towards a stronger currency.
However, the consensus is far from clear. XTB’s Kathleen Brooks warns that The yen could fall again once the scope of the fiscal program is known, while TD Securities expects a worse relative performance of the currency and keeps the chances of intervention high if the dollar exceeds the 160 yen level. The Ministry of Finance has already shown its discomfort with sudden movements and has underlined coordination with Washingtonwhich reinforces the idea that excessive depreciation could provoke actions in the market.
BONDS: THE GREAT FOCUS OF RISK
If there is a market that is especially sensitive to the electoral result, it is that of public debt. The fear of Greater issuance to finance spending has pushed yields upalthough the initial reaction has been contained. Brooks recalls that the Japanese bond market has been one of the worst in the developed world this year due to fear of an increase in debt in a country with a debt/GDP ratio close to 250%.
TD Securities believes that the curve steepening bias will continue, while Rabobank highlights that the reduction of purchases by the Bank of Japan – within its normalization process – was already putting upward pressure on yields. Even so, Aberdeen emphasizes thatThe PLD maintains a fiscally conservative tradition and that debt has fallen since the pandemic, which should reassure investors as long as fiscal policy remains sustainable.
FISCAL POLICY: MORE NUANCES OF WHAT THE MARKET DISCOUNTS
Although Takaichi has a reputation for favoring spending, analysts believe that reality could be more complex. Rabobank points out that bond issuance would only increase modestly thanks to greater collection derived from economic growth. Furthermore, with the supermajority already secured, the prime minister could feel less pressured to promise aggressive stimuliespecially in the presence of fiscally orthodox voices within his own party. Among the measures under scrutiny, the possible temporary suspension of the food tax stands out, although experts consider a total elimination of the tax unlikely. The Minister of Finance has insisted that fiscal management will not be lax, in a message addressed to the debt market.
THE BANK OF JAPAN, KEY TO BALANCE
Monetary policy will be another determining front. TD Securities warns of the possibility of a more accommodative Bank of Japan (BoJ) under the Takaichi administrationwith several board seats being renewed before 2027. However, the institution is reluctant to intervene to contain an eventual collapse of the bond market after having begun the reduction of its balance sheet, which increases surveillance over debt auctions. At the same time, prolonged yen weakness could raise imported inflation and push the central bank to accelerate rate hikescomplicating the balance between growth and financial stability.
