[MARKET ANALYSIS] JPY strengthens, JGB yields higher and Nikkei 225 soars as LDP secures a super majority

Overview:

• Japanese PM Takaichi’s LDP party won a landslide victory at the snap election on Sunday. NHK reported that the LDP secured a record 316 seats (single party majority required 233), which made it enough to secure a super majority (310 needed). Together, with coalition partner (JIP), they secured 352 seats. This would allow PM Takaichi to enact fiscally loose policy, with little push back in the Lower House; moreover, a supermajority allows her to override the Upper House to pass legislation.
• Japanese PM Takaichi said they will speed up consideration for sales tax cuts and will submit the bill if the government council approves the sales tax cut, while she reiterated that a weak yen has both merits and demerits, and noted her goal is to build a resilient country against forex swings. Furthermore, she said they will continue with responsible, proactive fiscal policy and reiterated that she will place importance on fiscal sustainability, as well as noted that she is thinking of making major changes to the current cabinet.

Seat Breakdown:

• LDP: Seats 316 (prev. 198)
• CRA: 49 (prev. 172)
• JIP: 36 (prev. 34)
• DPP 28 (prev. 27)
• Sanseito: 15 (prev. 2)
• Team Mirai 11 (prev. 0)

Market Reaction:

• USD/JPY initially gapped higher at the open (157.47), edged lower a few moments later, before reversing back to highs of 157.65. Since, the JPY is strengthening vs the USD, potentially on; a) high expectations of an LDP victory, b) higher JGB yields, c) jaw-boning via Finance Minister Katayama, d) odds of a BoJ hike in April rising to circa. 60% (prev. 54%).
• JGBs gapped lower by 30 ticks from 131.42 to 131.12 at the open, and then continued to trundle lower to a 131.10 trough; there was then a brief bounce overnight, before gradually declining back to the APAC low. Action today can be characterised by concern around potential increased spending and fiscal instability fears, but overall, the action suggests that markets are generally calm, as it stands.
• The Nikkei 225 is currently higher by 4.1%, surging above the 57k mark, to currently trade within a 56,330-57,757 range. UBS, pre-election suggested that a supermajority victory would allow the administration to pursue “unprecedented” pro-growth policies.

Desk Thoughts:

• ING: Writes that Takaichi will now have more freedom to pursue her policy goals. Analysts suggest that the result will likely boost equities, though weigh on JGBs and the JPY. On USD/JPY, analysts anticipate that the pair will trend back towards the 160.00 level, but see resistance around the 159.00 mark. On monetary policy, the bank remains cautious that an outright LDP victory would necessitate a speeding up of rate hikes at the BoJ. Instead, policymakers will await Shunto wage growth results in April, favouring a 25bps hike in June.
• Barclays: Analysts believe that LDP’s landslide victory may allow the BoJ to proceed with normalisation “somewhat” faster. As such, the bank brought forward its expectations of a 25bps hike to April (prev. saw July), and increased its terminal forecast to 1.5% (prev. 1.25%). In terms of reaction, analysts see an extension of the “Takaichi trade”, though should the PM shift to a more “prudent policy mix”, JGBs and JPY risk premia should “stabilise”.
• HSBC: “The big election win by the LDP will put wind in the sails of equity markets”, says Chief Economist Neumann. He added that bond market fears may be reduced, as a large governing majority should mean fiscal spending remains more restrained.
• Invesco: Global Market Strategist Chao suggested that political stability, continuity and reform optionality will be seen as positives by the market – he remains constructive on Japanese risk assets.
• Goldman Sachs: Sees scope for USD/JPY to head back towards 160.00, but believes the move may be short lived should Japan restart rate checks/intervenes – as such, analysts see a “muted” response in JPY, citing recent jawboning via Katayama; she noted that she will be “communicating” with the market if needed, in the coming days.

What’s next?

• Now attention turns to the reopening of the Diet – Kyodo reports that Japan’s government is looking at February 18th. Thereafter, focus turns to budget-related deliberations, which are reportedly expected to begin in the next few days.
• Political analysts suggested a January election could jeopardise passage of the FY26 budget before March, as Diet deliberations typically take place in the months leading up to the fiscal year-end. As a result, a provisional budget covering several months from April may be required. Therefore, in the near-term, the current government may opt to pass the Budget "as is", and make policy adjustments in the future.
• Analysts at Schroders suggest that as details of fiscal expansion plans filter through, “volatility” in the bond market “could rise again”, raising caution on seeing a “one-way climb from here in stocks”.
• Focus also remains on the consumption tax. Pre-election, Mizuho outlined two scenarios related to the foodstuffs tax. In one scenario, the bank suggests the LDP could defer or limit the tax cut to a level that can be funded, which would lessen the impact on JGBs. However, should the government enact its promises, then Mizuho suggests “it would be wise for investors to prepare for JGB market turmoil potentially exceeding that observed on 20 January, when interest rates experienced a historic surge”. Recently, Takaichi outlined that the abolishment would be done within FY2026, which in theory gives her until March 2027 to find funding for the policy. Following the election, she reaffirmed her vows to deliver the tax cuts.