Japan: Takaichi’s victory supports stocks but increases pressure on yen and government bonds
The early lower house elections in Japan have marked a historic transition, significantly strengthening the government of Prime Minister Sanae Takaichi. The Liberal Democratic Party (LDP) in fact achieved a result far exceeding expectations, winning 316 seats out of 465 and achieving an absolute majority on its own. Adding the seats of the Japanese Innovation Party (Ishin), the governing coalition reaches 352 seats, surpassing the two-thirds threshold and thus securing a super-majority that has not been seen for decades.
Analysts underline that the combination of political stability, new fiscal measures and prospects for monetary normalization could significantly change the scenario for global investors and managers.
Greater political stability and acceleration of policies
The super-majority guarantees the government a more stable horizon and the ability to quickly approve reforms and economic measures.
For Junichi Inoue (Head of Japanese equities | Portfolio Manager, Janus Henderson), the election result allows the government to proceed without obstacles: "The Takaichi administration is able to govern with greater stability over the next four years and is expected to proceed with its policy implementation plans without material friction."
According to Inoue, "investments aimed at strengthening Japan's industrial base and national defense remain at the center of the government's agenda."
Also Min Joo Kang (Economist, ING) emphasizes that "the coalition's victory gives Takaichi greater freedom in political decisions and strengthens her ability to pursue economic and foreign policy objectives."
From an institutional point of view, Lee Hardman (Senior Currency Analyst, MUFG Bank) highlights that the coalition can overcome the block of the upper house: "This means that any bill rejected by the upper house, where the coalition does not have a majority, could be overcome and approved again in the lower house.
Focus on fiscal policy
One of the key issues concerns the suspension or reduction of the consumption tax on food products.
According to Junichi Inoue (Janus Henderson), the measure is already central and could accelerate: "the administration has proposed a two-year moratorium on the consumption tax for food products during the election campaign, with bipartisan discussions expected to speed up its implementation." However, Inoue points out that "the Finance Minister has commented that it is necessary to identify revenue sources to offset the relief on the consumption tax."
Min Joo Kang (ING) confirms that the reduction of the food tax remains at the center of the debate: "Takaichi has stated that he would accelerate discussions on reducing the tax on food products."
From the market side, Lee Hardman (MUFG Bank) highlights the promise not to finance the measure with debt: "Takaichi has indicated that he wants to proceed with the promise (...) to suspend for two years the sales tax on food items without issuing new government bonds." Hardman also adds that the issue remains open and politically delicate.
Immediate impact on financial markets
The election result had an immediate effect on stocks, bonds, and currency.
As explained by Lee Hardman (MUFG Bank), the stock market reacted strongly: "The electoral victory also triggered a strong rally in the Japanese stock market, which rose to new all-time highs: the Nikkei 225 index increased by about 4%." On the contrary, "further sales were recorded on Japanese government bonds."
From the macro-financial side, Min Joo Kang (ING) believes that the market will enter a “risk-on” phase: "Risk propensity will dominate the market trend in the near future." Kang emphasizes that the effect will be positive for stocks but negative for yen and JGB.
Finally, Junichi Inoue (Janus Herderson) recalls the historical precedent of post-election rallies: "in both cases the TOPIX and Nikkei indices increased by over 30% (in yen terms) in the following five months." And concludes that the context remains favorable today: "Despite resilient fundamentals and interesting valuations, Japanese stocks remain underweight in many investors' portfolios."
Normalization of rates and role of the Bank of Japan
A central theme concerns the increase in yields and the role of the Bank of Japan in balancing growth and inflation.
According to Junichi Inoue (Janus Henderson), the rise in yields is not necessarily a sign of fiscal crisis: "we consider the yield of 10-year JGBs approaching 2%, in a context of stabilizing inflation (...) around 2%, as part of a broader normalization of interest rates."
Min Joo Kang (Economist, ING) emphasizes that the BoJ faces a delicate phase and will likely maintain gradualness: "we continue to expect it to maintain its gradual approach to raising rates and that a 25 basis point increase will be recorded in June." He also adds that the central bank will observe wages and inflation: "the BoJ will be more careful than before about the impact of higher yields on the economy and the tightening of financial conditions."
Risk/intervention on the yen-dollar exchange rate
The USD/JPY exchange rate remains a crucial element for the stability of Japanese markets, especially in light of the risk of intervention.
As explained by Lee Hardman (MUFG Bank), the yen had a volatile session: "The yen initially weakened, pushing the USD/JPY exchange rate up to a high of 157.76, but then completely reversed these gains, falling to a low of 156.22."
Hardman highlights that the downward pressure has been contained by the risk of intervention and directly cites the Japanese authorities: "Atsushi Mimura has warned that the authorities are monitoring market movements with a high sense of urgency."
Hardman adds that the memorandum with the United States strengthens the credibility of the intervention: "Japan and the United States have signed a memorandum of understanding that provides for the possibility of taking decisive measures (...) This certainly includes the intervention."
Also, Junichi Inoue (Janus Henderson) reminds that there would be a "defensive" band on the exchange rate: "it is hypothesized a coordinated intervention by Japan and the United States to keep the yen/dollar exchange rate in the high range of 150 yen."
For his part, Min Joo Kang (ING) predicts new upward pressures on the exchange rate: "we predict that the USD/JPY will approach the 160 level again, even though there will probably be a struggle between the market and the authorities around 159.
