Japan election results: LDP landslide victory signals bullish outlook for markets
Japan’s Liberal Democratic Party (LDP) has secured a decisive two-thirds supermajority in the Lower House, an unprecedented outcome that surpasses previous landslide victories,1 including the 62% majority under former Prime Minister Abe in 2012 and the 61% achieved under Prime Minister Koizumi in 2005.
In the aftermath of those elections, Japanese equities responded strongly, with the The Tokyo Stock Price Index (TOPIX) rising by 31% and 23%, respectively, over the subsequent 60 days.2
Prime Minister Takaichi’s decision to call an early snap election has clearly paid off, delivering a full four-year mandate.
The scale of the victory provides the government with exceptional legislative authority, including the ability to re-enact bills previously rejected by the Upper House and to advance constitutional initiatives.
Including seats won in coalition with the Japan Innovation Party, the ruling bloc now controls more than three quarters of the 465 contested seats, underscoring the strength of the mandate and significantly reducing the risk of opposition interference.
Investment Implications
From a market perspective, the outcome is strongly supportive for Japanese equities, particularly in the defence and economic security sectors, as Prime Minister Takaichi now has broad flexibility to pursue her pro-growth economic agenda and advance structural reforms.
At the same time, long-dated Japanese government bond yields are likely to face upward pressure, as more proactive fiscal spending aimed at reflating the economy could increase both fiscal and inflationary risks.
Overall, the combination of political stability, policy continuity, and reform optionality is likely to be viewed positively by markets, reinforcing the constructive outlook I continue to have for Japanese risk assets.
From a JPY perspective, we expect some near-term volatility as markets assess the implications of the LDP’s landslide victory for currency dynamics.
Under a reinvigorated LDP mandate, fiscal policy is likely to turn more expansionary, with measures such as a consumption tax cut on food now more likely. While this would further strain Japan’s fiscal position, it would also add to inflationary pressures, potentially bringing forward the timeline for Bank of Japan rate hikes.
With the The Federal Reserve System (Fed) on hold and the Bank of Japan (BOJ) unlikely to hike rates until Q2 of this year, I surmise that the USD/JPY could trade back closer to the 160 level.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
