Japan makes a bold bet on fiscal expansion, while the US faces a midterm test—how will the election year reshape global markets?

From Japan to Brazil, the intensive election cycle of 2026 is adding fresh uncertainty to global markets already shaken by U.S. policy shifts and geopolitical tensions. This weekend's snap election in Japan is the most unpredictable in years, Latin American countries' voting will test the region's rightward trend, and the U.S. midterm elections in November will be a key test for Trump’s administration.

According to Xinhua News Agency, Japanese Prime Minister Sanae Takaichi said at a press conference on January 19 that a House of Representatives election will be held on February 8. The current term for Japan’s House of Representatives members was originally set to expire in October 2028. Analysts believe that Takaichi seeks to transform her personal approval ratings into support for her expansionary fiscal policies, which may further relax fiscal discipline in this highly developed country with the highest debt-to-GDP ratio. Investors expect ongoing pressure on Japanese bonds, with some analysts predicting 10-year sovereign yields will rise from just over 2% to 3% this year.

Across the Atlantic, the U.S. midterm elections will determine control of Congress. Polls show Americans are generally dissatisfied with Trump’s handling of the economy, and Trump recently admitted Republicans may struggle to hold their slim congressional majority. Affordability concerns are the focus, and the White House has urgently launched several proposals to ease public worries about living costs.

The impact of these elections goes far beyond national borders. The yen’s movement has decoupled from the U.S.-Japan rate differential, shifting focus to fiscal stimulus; Latin American bond investors are betting right-wing governments will restore orthodox economic policies; while Zurich Insurance’s chief market strategist Guy Miller notes Trump’s pre-midterm policies “will affect all of us.”

Japan: The Most Aggressive Fiscal Gamble Among Developed Countries

Analysts point out that Japan’s February 8 snap election may usher in a new round of fiscal expansion for the developed world’s most heavily indebted nation. Takaichi aims to use the election to consolidate her coalition’s parliamentary standing and win support for expansionary fiscal policies. Latest polls show her approval ratings slipping slightly.

Normally, the yen and U.S.-Japan rate differential move together, but last year this relationship changed, with fiscal stimulus becoming the main driver. Investors expect ongoing pressure on Japanese bonds, and analysts predict 10-year sovereign yields may hit 3% this year.

U.S. Midterm Elections: Critical Test for Trump

November’s U.S. midterm elections will determine congressional control, representing a key test for Trump’s administration. According to Xinhua on January 28: U.S. President Trump said in a speech in Iowa on January 27 that Republicans must win the midterms. He warned that if Democrats win, the consequences would be very bad.

Analysts believe affordability is the central issue, and the White House has rushed out several proposals, including capping credit card interest rates, to tackle concerns about the cost of living.

According to a Reuters/Ipsos poll, Americans are generally dissatisfied with Trump’s economic performance. Historically, the incumbent president’s party tends to underperform in midterms, and Trump has recently admitted Republicans may not retain their slim majority in Congress.

Zurich Insurance's chief market strategist Guy Miller stated:

“The president clearly hopes for robust economic growth and a rising financial market, which will become an important part of his narrative and policies in the coming months. Policies leading up to the election will affect all of us.”

Latin America: Rightward Trend Faces A Test

Colombian voters will cast as many as three ballots starting in March, selecting new lawmakers and a president to replace leftist Gustavo Petro, who clashed with Trump. Colombian stocks outperformed regional peers last year, but bond investors are hoping the rightward trend sweeping Latin America will also reach Colombia and restore orthodox economic policies.

Ninety One portfolio manager Nicolas Jaquier said: “If there’s a rightward shift, it’s possible to see some fiscal adjustment.” He noted that if Petro’s ally Ivan Cepeda wins, it could allow structural reforms to the central bank and high court, removing obstacles that previously hindered some of Petro’s policies.

In Brazil’s October election, 80-year-old leftist president Lula leads rightwing Senator Flavio Bolsonaro in polls. Tellimer’s Geronimo Mansutti warns Lula’s win “could be quite negative for prices” due to worries over “large deficits and a higher debt trajectory for the next four years.” Brazil’s Finance Ministry currently forecasts national debt to peak at 88.6% of GDP in 2032, above the previous forecast of 84.3% in 2028.

But Jaquier points to Lula’s value as a “known quantity,” describing him as pragmatic and likely to appoint a credible team for fiscal adjustment.

Europe: Political Shifts Shake Bond Markets

Hungary’s April election offers the opposition the best chance in years to end Prime Minister Viktor Orban’s 16-year rule. The center-right Tisza party leads Orban’s right-wing Fidesz in polls, but the outcome remains uncertain. Concerns over living costs are high, and Orban is using fiscal giveaways to calm voter worries.

Fitch downgraded Hungary’s credit rating outlook to negative last year, citing “significantly worsening” public fiscal forecasts due to new measures enacted before the election. Tisza has pledged to repair ties with the EU and unlock frozen funds. Citi’s Luis E. Costa estimates this could mobilize €10 billion ($11.9 billion), which, combined with other reforms, “could enable higher investment spending while reducing the fiscal deficit and risk premium.”

Britain’s local elections in May could also attract foreign investor attention. The ruling Labour Party trails Reform UK in polls and struggles to deliver promises to boost the economy. Markets are sensitive to signs that fiscally restrained Starmer could be replaced, as recent bond sell-offs show. Societe Generale UK economist Sam Cartwright notes that under his base case, even if Starmer is replaced, the new leader will not have much room for major increases in government borrowing.

Frontier Markets: Elections After Debt Restructuring

Ethiopia and Zambia, both recovering from debt default, will hold elections this summer. Ethiopia’s ruling Prosperity Party led by Prime Minister Abiy Ahmed is almost certain to win the June vote, as the main opposition plans to boycott.

In Zambia, President Hakainde Hichilema is currently expected to win in August, but Chatham House experts warn that despite progress on debt restructuring and economic reform, living standards have yet to improve.

Investors are closely watching these two countries for opportunities in frontier markets. Zambia’s economy has performed more resiliently than expected, while Ethiopia’s defaulted bonds, although still in default, now trade above par.

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