Japan's ruling coalition wins more than half of the seats in the House of Representatives election, putting pressure on the yen and Japanese government bonds.

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Japan’s House of Representatives election has concluded, and the ruling coalition’s victory has sparked strong market expectations for fiscal stimulus, driving stock index futures higher while putting pressure on the yen and Japanese government bonds. The “Takaichi trade” has made a comeback.

According to Xinhua News Agency on February 9, in the recently concluded Japanese House of Representatives election, the ruling coalition formed by the Liberal Democratic Party and Japan Innovation Party secured more than half the seats. This result removes political obstacles for the current Japanese government to implement its economic agenda, and the market reacted swiftly, with investors betting that a new round of fiscal spending will boost Japan’s economic growth.

Bolstered by the election results, the financial market is exhibiting a clear “risk-on” pattern. Nikkei 225 index futures in early Tokyo trading rose about 3%, continuing the strong performance of Japanese stocks this year. Investors generally expect that the increase in spending advocated by Sanae Takaichi will directly benefit the stock market, especially sectors related to defense and technology.

However, the foreign exchange and bond markets are facing pressure. The yen weakened to near 157.61 against the US dollar in early Asian trading on Monday, approaching the 160 level that previously triggered Japanese authorities’ intervention. At the same time, due to concerns that the government’s expansionary fiscal policy may worsen the debt burden, Japanese government bonds face the risk of further selling, as global fund managers had already reduced their exposure to Japanese bonds ahead of the election.

“Takaichi trade” may dominate stock market

With the ruling coalition gaining more than half the seats, analysts believe the so-called “Takaichi trade” may become the dominant theme in Monday’s market. The TOPIX closed at an all-time high last Friday and has gained over 8% so far this year, far exceeding the approximately 2% increase in developed market equity indexes.

Tim Waterer, Chief Market Analyst at KCM Trade, said: “Overall, the election result is welcomed by the Nikkei index, as the outcome is clear and Sanae Takaichi’s stimulus policies now have a clearer political path.”

In equities, the areas of greatest market focus include sectors such as defense and nuclear energy, which align with Sanae Takaichi’s national investment agenda. Gerald Gan, Chief Investment Officer at Singapore’s Reed Capital Partners, pointed out: “Japan’s stock market is expected to rebound on this victory. Sectors targeted by Sanae Takaichi for increased spending, such as military, artificial intelligence, and semiconductors, could be the biggest beneficiaries.”

Yen nears intervention threshold, Japanese bonds face selling risk

In the foreign exchange market, the yen traded in a narrow range in early Asian trading on Monday, slipping to 157.61 against the US dollar. Last week, the yen dropped 1.6% and is now still in the vicinity of 160, a level that previously prompted direct intervention by Japanese authorities.

Neil Jones, Managing Director of Sales and Trading at TJM Europe, commented via email: “The natural direction for the yen will be further weakness. It seems the entire global FX market is expecting some form of official action.”

The bond market is also under pressure. Due to poor liquidity and concerns about Japan’s fiscal sustainability, Japanese government bonds suffered sharp losses in January. Global fund managers, including Schroders Plc and JPMorgan Asset Management, reduced their holdings of Japanese government bonds ahead of the election, especially super-long bonds. Takaichi’s proposal to temporarily cut the food sales tax is one of the key drivers triggering sell-offs.

Rong Ren Goh, Fixed Income Portfolio Manager at Eastspring Investments, commented: “This is a favorable outcome for the Liberal Democratic Party, though the market was not completely surprised. Over the past few weeks, Japanese government bond yields and the yen consolidated ahead of the election, so this result should now allow the market to resume trading according to existing trends.”

Bank of Japan rate hike expectations intensify

Despite fiscal concerns, bonds performed slightly better last week, easing upward pressure on yields. Masanari Takada, Quantitative and Derivatives Strategist at JPMorgan Securities Japan Co., commented: “While this result increases tension among bond market participants, the current position of the Liberal Democratic Party may give Prime Minister Sanae Takaichi political maneuvering room to listen to bond market concerns.”

It’s noteworthy that during the vote count, Sanae Takaichi stated her remarks on the benefits of a weak yen were taken out of context and reiterated her desire to build an economy capable of withstanding currency fluctuations.

Currently, market focus has shifted to the Bank of Japan’s policy path. Overnight index swaps indicate about a 75% chance that the Bank of Japan will hike rates by 25 basis points at its April meeting, and this is fully priced in by June.

Risk warnings and disclaimerThe market is risky, investment requires caution. This article does not constitute personal investment advice and does not consider any individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk. ```