Japan's stock market rose in 10 out of 12 elections; will Sanae Takashi's luck hold this time?

The possible announcement of an early election by Japan's Prime Minister Sanae Takaichi is testing a market pattern that has persisted for over 30 years. Historical data shows that in 10 out of 12 House of Representatives elections since 1990, the benchmark Topix index has recorded gains during the period from the dissolution of parliament to the election. However, this time, political uncertainty and "fiscal cliff" risks may become key variables affecting market trends.

According to Xinhua News Agency, Japan's Kyodo News reported on the 13th that Sanae Takaichi has decided to dissolve the House of Representatives on the opening day of parliament on the 23rd and hold an early election. If the House of Representatives is dissolved on January 23, the election schedule may be announced on January 27 with voting on February 8, or announced on February 3 with voting on February 15.

The biggest concern raised by the early election is that the passage of the budget bill may be forced to be postponed until after April. More seriously, according to Reuters, if a new debt bill is not passed in a timely manner, the government will not be able to issue enough bonds to fund the FY2026 budget, which may result in a situation similar to the "fiscal cliff" faced by the United States. Nearly a quarter of the budget needs to be financed by debt, with 22.9 trillion yen used to fill the deficit.

This decision has sparked criticism within the Liberal Democratic Party and among opposition parties. Critics argue that Takaichi has broken her promise to prioritize addressing livelihood issues such as rising prices, placing the interests of the Liberal Democratic Party ahead of the national interest.

Historical Patterns Support Short-Term Gains

Bloomberg's compiled data shows strong market performance during election periods. In 10 out of 12 House of Representatives elections since 1990, the Topix index recorded gains from the dissolution of parliament to the election period.

Eiji Kinouchi, chief technical analyst at Daiwa Securities, stated in a report last week that if Takaichi wins the election, expectations for stable economic policy will rise, potentially leading to about six months of market gains. He predicted that if the House of Representatives is dissolved in January, the Nikkei 225 index could reach 68,000 points between July and September, about 30% higher than last Friday's closing price.

In the three elections where the Liberal Democratic Party won the most seats—Junichiro Koizumi's victory in 2005, Shinzo Abe forming a second cabinet in 2012, and 2014—the market saw the most significant gains six months later: 44%, 70%, and 18% respectively. Takaichi's approval rating was 64% in December last year, higher than Koizumi's 50-60% range in 2005 and comparable to Abe's level when forming the cabinet in 2012.

From a market perspective, stock price increases during election periods usually stem from expectations of a stable government foundation and economic policy, hopes often driven by high approval ratings.

Medium-Term Trends Are Not Set in Stone

Historical data also reveals another side. In 6 out of the 12 elections, gains turned to losses six months later, indicating that not all early gains are sustained.

Ryota Sakagami and other strategists at Citi Global Markets Japan wrote in a report on Monday that if the ruling party becomes more cautious, the possibility of dissolving parliament early is low. An early election may also trigger criticism for placing political stability above policy implementation, and concerns that the ruling party’s seat increase may prove disappointing.

Sakagami noted that political stability is not guaranteed. The ruling coalition led by Takaichi holds only a slim majority in the House of Representatives and has no advantage in the House of Councillors. Even if they win the election, Takaichi could strengthen control of the House of Representatives but would still need cooperation from opposition parties to pass legislation in the House of Councillors.

"Fiscal Cliff" Risks Emerge

According to Reuters, the early election may delay parliament's approval of a bill allowing the government to issue bonds to fill the deficit. According to the law, the government cannot issue bonds except for "construction" bonds used to fund public works projects. The government allows issuance of "deficit-covering" bonds through separate bills, but the current law's five-year validity expires at the end of the fiscal year this March.

If the debt bill cannot be passed in time, the government will not have enough funds to support the major spending plans laid out by Takaichi in the record-breaking $783 billion budget. According to government plans, 29.6 trillion yen in new bonds are scheduled to be issued for FY2026, of which 22.9 trillion yen will be used to fill the deficit.

With support from the opposition Democratic Party for the People, parliamentary approval of the debt bill was considered a certainty. But the early election may anger the Democratic Party for the People because the party’s advocated tax cut plan will be put on hold. According to Kyodo News, Democratic Party for the People leader Yuichiro Tamaki said Tuesday that the party's decision on whether to cooperate to pass the debt bill is now "undecided."

The benchmark 10-year Japanese government bond yield hit a 27-year high on Tuesday, as markets expect an early election could give Takaichi the mandate to push aggressive fiscal stimulus measures. Following news that Takaichi may dissolve parliament this month and hold an election in February, the yen and Japanese government bond prices fell sharply.

Debt Pressure Adds to Market Worries

Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, pointed out that as far as early elections are concerned, almost no positive factors exist for the bond market due to heightened political uncertainty. Investors will remain wary of taking on interest rate risk, which could put upward pressure on the yield curve.

Japan’s debt level is twice the size of its economy, the highest among major economies. Debt financing costs now account for more than a quarter of total government spending, and as the Bank of Japan raises interest rates, debt financing costs could rise further.

For investors, historical patterns offer some short-term optimism, but delays in budget deliberations, uncertainty over the debt bill’s passage, and postponed policy implementation may become key factors affecting medium-term market trends. Whether Takaichi’s high approval rating can be translated into a stable political foundation and sustained market gains remains to be seen.

Risk warnings and disclaimerThe market has risks, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the unique investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions expressed herein are suitable for their specific situation. Investment is at your own risk.