Outrageous Predictions
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Katrin Wagner
Head of Investment Content Switzerland
Chief Investment Strategist
Clear mandate: NHK projects the LDP is on track for a single-party two-thirds majority, giving PM Takaichi strong policy room.
Fiscal impulse is likely: Our base case is that stimulus is coming — but markets will reward targeted, time-bound and funded measures.
Market map: Near-term support for equities on clarity; JGB curve may steepen first then potentially flatten; JPY stays sensitive to fiscal credibility and BOJ follow-through.
Japan’s snap election delivered a clear result. With results now clearer, NHK projects the ruling LDP is on track for a single-party two‑thirds majority in the 465-seat lower house — a scale of victory the party has not achieved before. The ruling coalition with the Japan Innovation Party was poised to secure more than 300 seats, enough to override upper house vetoes. Overall, the resounding election victory gives PM Takaichi a strong mandate and significantly more room to maneuver on policy.
A decisive result is typically supportive in the near term because it reduces political uncertainty — a “certainty premium.” Our base case is that fiscal stimulus is coming — that was largely the point of calling these elections in the first place: to secure a strong mandate to move faster on the domestic agenda.
Our view is, however, that the positives likely outweigh the negatives for markets. A supermajority expands policy room on tax relief, fiscal stimulus, defense and industrial policy, but it also increases the chance of policy coherence, flexibility and fewer surprises.
The main medium-term watch is whether stimulus is targeted, time-bound and funded (market-friendly) versus open-ended (which would raise concerns on funding, debt dynamics, and geopolitical risk).
With a strong mandate, the government can pass measures faster and with fewer compromises. That can be market-friendly if it leads to clearer, more coherent policymaking.
But a landslide also cuts both ways:
It can embolden bigger fiscal and security ambitions (raising questions on issuance, debt sustainability, and risk premia).
Or it can create room for pragmatism, as a secure leader has less need to campaign from the edges and more incentive to protect approval by moderating the most market-sensitive proposals.
A relief bid is plausible: political clarity and a strong mandate typically support risk sentiment.
Where stimulus could show up (based on Takaichi’s stated priorities): the government has consistently framed its agenda around “responsible and proactive” fiscal expansion with an emphasis on investment-led growth. In practice, that points to potential support for areas tied to defense, AI and digital infrastructure, semiconductors, and strategic supply chains/critical materials (including rare-earth-linked themes), alongside broader spending aimed at reinforcing economic and national security priorities.
The rally’s durability, however, depends on the bond market. If fiscal headlines quickly re-ignite JGB volatility — especially at the super-long end — equities may shift from a broad rally to a sector-rotation market.
In that rotation:
Policy-linked beneficiaries (defense, strategic capex, domestic investment themes) may hold up better.
Rate-sensitive and long-duration exposures may lag if yields back up.
Want to explore ideas across Japanese sectors? See our Japan stocks shortlist here: Japan stocks shortlist.
The election result can be bond-positive if it produces more coherent policymaking and fewer surprise concessions.
But the key risk is that a strong mandate becomes a green light for larger/unfunded fiscal expansion. If markets hear “bigger spending” without credible funding or sequencing, the super-long end (30–40Y) is typically where the stress shows up first.
Our view is that, at first glance, Takaichi’s policy mix argues for curve steepening: her emphasis on “responsible and proactive” fiscal expansion is likely to push up longer-dated yields, while a preference for a more dovish monetary backdrop could keep the short end more anchored. That logic may dominate immediately after the election, especially after a stronger-than-expected showing by the ruling party. Indeed, 30-year JGB yields are already rising early on Monday.
However, any initial steepening may not last. Even if borrowing needs rise with stimulus and tax relief, policymakers may be cautious about adding too much supply at the super‑long end. Those maturities have already seen large moves and remain volatile. That leaves the Ministry of Finance with an incentive to skew issuance toward shorter maturities — which would, over time, place more upward pressure on front‑end yields.
The yen adds another potential flattening impulse. Larger fiscal outlays and tax cuts can keep inflation pressure elevated and real rates low, which may exacerbate currency weakness. If yen depreciation feeds back into inflation and living‑cost pressures, the BOJ could end up hiking more than markets currently expect — lifting short‑term yields and flattening the curve.
The yen response will be driven by the policy mix:
Yen-negative risk: if post-election messaging revives concerns about unfunded tax relief and larger issuance, the yen can stay heavy — and “160” chatter returns.
Stabiliser: if messaging pivots to pragmatism/fiscal discipline (targeted relief, clear funding, careful pacing), the yen can stabilise and volatility can fade — especially if positioning was already stretched going into the result.
Targeted relief, clearer funding language, and careful pacing → JGB yields stabilise, yen volatility eases, and equities can extend gains.
Large fiscal push with limited funding detail + bolder security agenda → long-end yields rise, yen weakens, and equities rotate rather than rally broadly.
This result removes the “who governs?” question. Markets now price the “how do they govern?” question — and that comes down to whether a supermajority becomes a mandate for disciplined delivery or bigger, faster fiscal ambition.