Japanese Prime Minister Sanae Takaichi’s coalition delivered a sweeping and historic election victory on Sunday, securing a strong parliamentary majority that gives her authority to press ahead with a program of tax cuts and fiscal stimulus intended to reflate the economy.
Market commentators and strategists have offered a range of potential reactions from financial markets tied to the election result. Several forecast that equities, especially domestic-oriented firms, could benefit from any policy package aimed at boosting consumption and government spending, while fixed income and currency markets may move in the opposite direction.
Equities, the yen and bond yields
Skye Masters, head of markets research at National Australia Bank in Sydney, said the general expectation is for Japanese stocks to rise alongside a weaker yen and possibly higher JGB yields. "The view is you’re probably going to see Japanese stocks up, but a weaker yen and possibly higher JGB yields," she said, adding that the key market question will be how JGB yields react and whether any rise filters into global bond markets amid concerns over increased fiscal spending and potential implications for sovereign issuance.
Mahjabeen Zaman, head of FX strategy at ANZ Bank in Sydney, noted that the decisive result supports Takaichi’s push for bold spending and a more assertive foreign policy. She said the victory "will help advance Takaichi’s pro-stimulus policies, allowing her to move forward without needing to negotiate with other parties on every issue." Zaman added: "We do expect the yen to be weaker going forward on the back of this result. In terms of JGB yields, we expect them to also move higher, just reflecting higher inflation expectations and a little bit of that fiscal agenda that Takaichi will be pulling through."
Winners among corporate sectors
Jamie Halse, managing director at Senjin Capital in Sydney, highlighted the likely beneficiaries of any stimulus. He said: "Any stimulus measure is likely to positively impact any domestic-focused company and small to midcap stocks tend to be domestically focused." Halse pointed to two specific elements he sees as supportive for certain sectors - a cut in the consumption tax on food and increased military spending. "Cutting the consumption tax on food is a positive for domestic consumption spending (and) increased military spending is a positive for defence stocks," he said, while noting that the broad question remains what additional measures could be implemented now that the ruling coalition holds a two-thirds majority.
Halse also observed that the electorate has clearly endorsed what he described as "Sanaenomics," and suggested that the mandate raises the possibility of further policy measures being unveiled.
Implications for JGBs and fiscal policy
Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, emphasised how the altered parliamentary dynamics may affect future fiscal decisions and the JGB market. He said that with the ruling party less compelled to accommodate expansionary demands from opposition parties, this dynamic could be read as positive for the JGB market. At the same time, he noted that Prime Minister Takaichi, buoyed by public backing, is expected to accelerate policies described as "responsible proactive fiscal policy."
Tsuruta cautioned that whether a tax cut can be implemented, and what stable revenue source would support it, "remains fluid." He observed that in the prior week the ruling coalition’s strong performance had led some in the JGB market to believe a consumption tax cut might be set aside, a view that produced a bull flattening in yields. The renewed focus on a possible consumption tax cut, he said, could prompt a reversal of that move or at minimum act as a drag on the recent bull-flattening pressure.
For now, market participants will be watching both policy announcements and technical signals in equities, the yen and JGBs for signs of how Takaichi’s mandate translates into economic measures and investor responses.