Alicia Gª Herrero (Natixis) | At the Lower House election on February 8th, Takaichi’s Liberal Democratic Party (LDP) won a historical victory with 316 seats, which brings well above the absolute majority (Chart 1). With the Japan Innovation Party (JIP) gaining 36 seats, the LDP led ruling coalition obtained 75% of total seats at the Lower House. These results should bring higher political stability, as the LDP was in coalition before the elections and with a very tight majority. Going forward, a Special Diet Session will be convened around February 18th where Takaichi will be nominated once again as Japan’s Prime Minister (PM).
Takaichi arguably won the public confidence to reshape the country under her vision of “resilient Japan” which revolves around pro-growth policies with national security at front*. The government plans to promote investments in strategic sectors such as AI and semiconductors, while developing a ten-year project amounting to JPY 100 trillion to strengthen infrastructure. To alleviate households’ elevated living expenditure, the LDP will consider eliminating the consumption tax on food for two years, which is highly controversial because of the potential impact of the ensuing larger fiscal deficit on JGB yields. In fact, Takaichi was silent on that measure during the campaign but she did confirm she would explore it after her victory, which might be read as a signal to LDP senior members who had opposed this measure. The government also intends to expand defense expenditure to above 2% and to solidify the US-Japan alliance. Finally, the political tensions with China are likely to linger, as Takaichi does not seem to have been penalized domestically for remarks on Taiwan last November and/or China’s retaliation.
Markets have responding confirming the “Takaichi trade” after her first election, namely stronger equity market and higher JGB yields, given the news on the consumption tax cuts and potential news expenditure (Chart 2). The Yen appreciated somewhat but it is too early to tell as Takaichi’s position on fiscal and monetary policies still needs to be clarified.
Japan’s Takaichi landslide victory puts us back positive for stocks and negative for Japanese bonds
