The resounding victory for Takaichi’s Liberal Democratic Party (LDP) in Japan’s snap election has fueled bets that fiscal spending will accelerate.
Japanese stocks surged while bonds and the yen slumped in the trading immediately following the election result.
While markets have largely expected continued fiscal expansion under the LDP, investors will be closely watching for any changes.
“A decisive LDP victory reinforces a ‘turbo-charged Takaichi trade’ — stronger Nikkei, steeper JGB curve and a weaker yen,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management.
“The result reduces political uncertainty and strengthens the broader ‘Japan is Back’ narrative: structurally higher yields, a competitive yen and governance‑led earnings improvement, all supporting renewed confidence from global investors in Japanese assets.”
While most of the trade has been largely priced in, a key focus will be the scale of fiscal expansion in Japan, according to Sree Kochugovindan, senior research economist, at Aberdeen Investments.
“In particular, developments around the temporary food tax cut pledged during the election campaign will be closely followed,” he said.
“The LDP landslide does not give Takaichi free reign to just spend. The LDP are fiscally conservative and Takaichi has been very mindful of bond investors.”
He noted that debt/GDP ratio has steadily declined since the pandemic and Takaichi’s latest fiscal and economic package will keep it on downward trend.
David Clewell, associate portfolio manager for multi-asset global income at T. Rowe Price said: “Given the Liberal Democratic Party’s strength of decades, for multi‑asset investors, the central case for the snap election is less likely about a large policy pivot and more about the strength of the governing mandate.”
“This should influence the speed and magnitude of policy actions by the government. The fiscal policy remains biased toward expansion.”
He sees continued appeal of Japanese equities due to improving growth dynamics, corporate reform, and reflation, supporting earnings growth.
AloJapan.com