Japanese financial markets reacted sharply after Prime Minister Sanae Takaichi's decisive victory in a snap lower house election, with equities surging to record levels, sovereign yields moving higher and the yen weakening against major currencies.
Takaichi's Liberal Democratic Party (LDP) won 316 of the 465 seats in the lower house, securing a so-called supermajority that permits the ruling party to advance its policy agenda, including large-scale spending measures and promised tax relief, without needing to negotiate with other parties. That parliamentary dominance also allows the LDP to pass legislation without requiring approval from the upper house.
Japan's benchmark Nikkei 225 share average climbed as much as 5.7% to a record 57,337.07 by 0030 GMT. The broader Topix index rose 3.4% to a record 3,825.67. Markets interpreted the election outcome as a clear signal about the policy path ahead, with investors adjusting positions accordingly.
In the government bond market, yields increased as prices fell. Ten-year Japanese government bond yields rose by as much as 4.5 basis points to 2.275%, while 30-year JGB yields climbed up to 6.5 basis points to 3.615%. Other maturities had not yet traded at the time of reporting. Bond-market moves followed earlier volatility in the long end: the 30-year JGB yield had surged to a record 3.88% last month when Takaichi initially proposed suspending the tax on food for two years, though it had been noticeably lower over the prior two weeks.
Currency markets reflected similar repositioning. The yen eased as much as 0.3% to reach 203.30 per Swiss franc, marking an all-time low for the currency on Monday. It also fell 0.4% to 186.55 per euro, approaching the recent record low of 186.86 from last month, and slid 0.5% to as weak as 157.95 per U.S. dollar, a two-week trough.
Market participants and analysts framed these moves around expectations for fiscal policy and the likely trajectory of yields and exchange rates. George Boubouras, head of research at K2 Asset Management, noted that the breadth of the LDP majority provides clarity about Japan's near-term direction: "short term, markets adjust and are assuming weaker yen and potentially higher yields across the curve," he said. Boubouras added that "once policies are lined up with the new massive majority, the yen should hold up again."
From a policymaking standpoint, some analysts argue the LDP's commanding win could be preferable for bond investors because the party will not need to compromise with opposition forces that have advocated for still deeper tax relief and broader fiscal stimulus. That dynamic may reduce the risk of even larger, less predictable fiscal expansions.
Japan's top currency diplomat, Atsushi Mimura, cautioned that the government is monitoring currency moves closely. Mimura said officials are "closely watching currency movements with a high sense of urgency," signalling the possibility of yen-buying intervention if conditions warrant it.
Context and market implications
The immediate market reaction—record equity indices, rising JGB yields and a softer yen—reflects investor expectations for policy clarity and for near-term adjustments in exchange rates and interest-rate-sensitive asset prices. Equity and financial-sector participants appear to have priced in benefits from a clearer path for fiscal measures, while bond and currency markets are repricing risk premia on the prospect of larger spending and tax measures that can influence interest rates and external competitiveness.
What remains uncertain
While the election result clarifies the ruling party's ability to enact policy, the timing, scope and market consequences of specific fiscal measures are not detailed in market moves themselves. Authorities' readiness to intervene in currency markets, as signalled by the finance ministry, introduces another variable that could alter near-term exchange-rate dynamics.