Takaichi’s Initial Election Strategy in Japan Shakes Up Yen, Bonds, and Equities

Japanese Markets Surge Amid Speculation of Early Election

Photographer: Kiyoshi Ota/Bloomberg

Reports that Prime Minister Sanae Takaichi is considering calling a snap election have sparked a rally in Japanese stocks, while government bonds declined and the yen weakened further, increasing the risk of currency intervention.

If Takaichi, who took office in October, secures a win at the polls, she would gain a stronger mandate to pursue her assertive foreign policy and continue with economic stimulus measures.

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Photographer: Kiyoshi Ota/Bloomberg

According to Kyodo News, Takaichi is expected to announce the dissolution of the lower house when the new parliamentary session begins on January 23, following multiple reports that an election is under consideration. The Yomiuri newspaper previously indicated that a vote could be scheduled for either February 8 or 15, citing unnamed government sources.

Even before the latest developments, the yen had already dropped to its lowest level since July 2024, which was the last time the Finance Ministry intervened in the currency markets.

While the yen and bonds faced downward pressure on Tuesday, Japanese equities soared to new highs. Exporters are poised to benefit from the weaker yen, and other companies may gain if Takaichi’s expansionary policies continue. However, yields on long-term government bonds surged to unprecedented levels amid concerns that her policies could strain public finances.

Market and Political Reactions

Rinto Maruyama, a strategist at SMBC Nikko Securities, noted, “As it becomes more likely that the LDP will secure a majority on its own, worries about further fiscal stimulus supported by public approval could accelerate the sell-off of Japanese government bonds and the yen.”

An early election would likely leverage Takaichi’s strong approval ratings, currently around 70%, and could solidify the Liberal Democratic Party’s (LDP) control of the lower house, where it currently holds a slim majority of 233 out of 465 seats.

However, calling an early vote carries significant risks. While the LDP has often used snap elections to capitalize on surges in popularity, a similar strategy backfired for former Prime Minister Shigeru Ishiba in 2024, resulting in the loss of the ruling coalition’s majority.

This would also be the first time in 25 years that the LDP faces an election without a coalition partner known for mobilizing nationwide support.

Expert Opinions and Economic Impact

Yu Uchiyama, a political science professor at the University of Tokyo, commented, “She’s taking a major gamble, relying solely on her popularity. Given the extensive media coverage and information from within the LDP, not holding the election now would damage her credibility.”

Tuesday’s market movements echoed the reaction to Takaichi’s appointment last year, with stocks climbing and bonds falling as her aggressive fiscal policies buoyed equities but pressured the yen and government bonds.

Masahiko Loo, a senior strategist at State Street Investment Management, observed, “For now, the path of least resistance is a stronger Nikkei, a weaker yen, and steeper yields on JGBs, reflecting the so-called ‘Takaichi trade.’”

The yen fell as much as 0.5% on Tuesday afternoon, despite Finance Minister Satsuki Katayama’s comments about discussing the currency’s movements with US Treasury Secretary Scott Bessent. This suggestion of possible intervention only briefly supported the yen before election speculation resumed driving the market.

The Nikkei 225 index jumped over 3%, and the Topix index gained more than 2%, both reaching new records. Meanwhile, the yield on 30-year Japanese government bonds climbed as high as 3.52%.

Loo added that if the yen drops past 161 to the dollar, intervention could become likely.

Political Landscape and Coalition Dynamics

Since taking office, Takaichi has consistently received high marks in public opinion polls, sometimes reaching 80% approval. Despite her popularity, she leads a government with a fragile hold on power and a new coalition partner after two election defeats cost the ruling coalition its majority in both houses.

Komeito, the LDP’s long-time coalition ally, left the partnership last October, forcing Takaichi to seek new alliances. Komeito had provided crucial grassroots support for over 20 years.

Electoral Uncertainties

The LDP’s new coalition with the Japan Innovation Party remains untested. While the party is influential in the Osaka region, it has struggled to win support elsewhere, and the alliance does not yet include coordinated election strategies, adding more unpredictability to the upcoming vote.

Other smaller parties, such as the Democratic Party for the People and Sanseito, have made significant gains in recent elections, complicating the outlook. Although Takaichi appears to be regaining support from these parties, the public may not favor an early election.

Holding a vote in February would likely delay the approval of the budget for the fiscal year starting in April, potentially drawing criticism that Takaichi is prioritizing political advantage over addressing inflation.

Some senior LDP figures, including influential leader Taro Aso, reportedly have reservations about the timing, raising questions about the extent of Takaichi’s support within her own party.

Uchiyama noted, “If the Constitutional Democratic Party and Komeito succeed in cooperating for the election, it could deal a serious blow to the LDP.”

Still, a decisive win for the LDP would make it easier for Takaichi to advance her economic agenda, though it could further strain Japan’s fiscal health. Atsushi Takeda, chief economist at Itochu Research Institute, warned, “Looser fiscal policy may boost the economy in the short term, but it risks fueling inflation and driving up long-term yields. Over time, this could have negative consequences.”

With contributions from Keiko Ujikane and John Cheng.

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