Japanese stocks and the yen both rose; Tomoe Takashi made concessions, and the market chose to temporarily believe!

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The market reaction after Japan’s general election indicates investors have decided to temporarily give Prime Minister Sanae Takaichi the benefit of the doubt, shielding her for now from the market turbulence that previously threatened her spending plans. With the Liberal Democratic Party (LDP) led by Takaichi winning the largest single-party victory in the House of Representatives since World War II, markets are betting that the overwhelming advantage will bring policy clarity and reduce the risk of fiscal disaster.

On Monday, Japanese stocks soared to historic highs after the election results were announced, with the Nikkei 225 index climbing as much as 5.7% intraday, breaking through the 57,000-point mark. Meanwhile, the yen and the Japanese government bond markets were calmer than many analysts predicted, avoiding the severe volatility previously sparked by concerns over fiscal sustainability. This “rising stocks and currency” scenario shows that the market is interpreting the election results as a removal of political uncertainty, not a signal for immediate disorderly spending.

Investors’ positive reaction is mainly driven by expectations of policy stability. On February 9th, Sanae Takaichi pledged that she would not finance consumption tax cuts by issuing deficit bonds, but would instead raise funds through non-tax income and subsidy reviews. This stance contrasts with earlier market fears of “reckless borrowing,” and, combined with the ruling coalition's “super majority” seats, reinforces expectations of policy continuity and controllability.

However, this trust may be fragile and temporary. Traders remain keenly aware that Japan’s room for maneuver in fiscal and monetary policy has already narrowed. Analysts warn that if the details of the budget published later reveal inadequate funding or rising inflationary pressure, bond and currency markets will respond quickly.

“Takaichi Trade” relaunches, stock market hits record highs

Boosted by the election result, Japanese stocks saw a surge as part of the typical “Takaichi trade.” Both the Nikkei 225 and TOPIX indexes set record highs on Monday. Morgan Stanley strategists, including Rie Nishihara, quickly raised their year-end target for the Nikkei 225 to 61,000 points after the election, citing enhanced expectations for political stability.

HSBC Asia Chief Economist Frederic Neumann pointed out that the LDP’s landslide victory would “inject momentum” into the stock market. He believes that Takaichi’s stronger mandate to advance structural reforms could boost productivity and corporate profits. Analysts generally think that sectors benefiting from Takaichi’s spending plans, such as defense and semiconductors, may enjoy a new round of gains.

Market observers noted that this victory has eliminated the political uncertainty that has plagued the ruling party since former Prime Minister Shinzo Abe’s assassination. Asymmetric Advisors’ Japanese equity strategist Amir Anvarzadeh stated that, from the stock market’s perspective, the LDP’s overwhelming victory is ideal.

Commitment to fiscal discipline soothes bond market concerns

Despite earlier fears that Takaichi’s expansionary policies would trigger a bond sell-off, the Japanese government bond market was relatively stable on Monday after policymakers sent a series of reassuring signals. Although yields on longer-term Japanese bonds initially jumped, with the 10-year yield rising 4 basis points to around 2.27%, they soon quickly retreated, easing fears about disorderly selling.

The turning point was Takaichi’s clarification of her fiscal path. In her February 9th speech, she emphasized the need to escape Japan’s excessive austerity and investment shortage but also made it clear that she will use non-tax income and cut unnecessary subsidies to support tax cuts, rather than simply increasing deficits. Previously, Finance Minister Satsuki Katayama also stressed that the proposed consumption tax cut would be limited to two years and only apply to food.

Aberdeen Investments senior research economist Sree Kochugovindan commented that the LDP’s overwhelming victory does not mean Takaichi is free to spend as she pleases. He noted that the LDP is fiscally conservative and Takaichi is particularly attuned to the reactions of bond investors. Phillip Securities Japan Ltd. research director Kazuhiro Sasaki also commented that the opposition’s lack of progress in the election means “permanent consumption tax cuts are no longer on the table,” which is a huge relief for the bond market.

The yen unexpectedly strengthens, diverging from typical logic

Unlike the typical “Takaichi trade” which implies a weaker yen, the yen-dollar rate climbed on Monday, rising as much as 0.6% to 156.22, moving further away from the 160 mark that previously triggered intervention by Japanese authorities.

MUFG senior currency analyst Michael Wan thinks the unusual movement may reflect Takaichi’s post-election commitment to fiscal sustainability, as well as Finance Minister Katayama’s remarks about supporting yen stability and coordinating with US authorities. Katayama stated earlier on Monday that action—including intervention—is not ruled out in response to sharp exchange rate moves deviating from fundamentals.

While Citi analysts believe the yen is unlikely to drop significantly below the 160 mark, ING noted in a report that tug-of-war between the market and authorities may occur near 159.

Diplomacy and long-term challenges: from the White House visit to budget review

Looking ahead, the market’s focus will shift to how Sanae Takaichi implements her “bold measures.” Takaichi has said she wishes to visit the US next month and is scheduled to meet US President Trump on March 19 at the White House. Discussions are expected to cover defense spending and investment commitments under Japan’s $550 billion package. Takaichi emphasized that active fiscal policy will be key to her government’s transformation, aiming to promote crisis management and advanced technology investment.

Although the market has found temporary reassurance, the road ahead is not smooth. Kazuhiro Toyoda, head of Japanese equities at Schroder Investment Management, warned that as details of the fiscal expansion plan unfold, bond market volatility could return. A special parliamentary session is expected as early as February to begin reviewing the fiscal 2026 budget. Given Japan has the highest debt in the world, with the debt-to-GDP ratio approaching 230% in 2025, any spending plan that appears unfunded could quickly reverse current market sentiment.

David Chao, global market strategist for Invesco Ltd Asia-Pacific, summarized: the combination of political stability, policy continuity, and reform options may be seen positively by the market, but this must be built upon ongoing fiscal prudence.

Risk Warning and DisclaimerThe market contains risks, and investment must be cautious. This article does not constitute personal investment advice, nor does it take into account the special investment goals, financial standing, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific situation. Investing based on this article is at your own risk. ```