Decisive Win for Japan’s Takaichi Could Be Best Scenario for Bonds, Yen

TOKYO — A strong victory for Japan’s ruling coalition led by Prime Minister Sanae Takaichi in the upcoming Feb. 8 general election may provide much‑needed stability for turbulent bond and currency markets, analysts said on Thursday, even as her campaign’s fiscal pledges have repeatedly shaken investor confidence.

Markets have been on edge in recent weeks as Japan’s bond yields surged to record highs and the yen weakened to levels not seen in roughly 18 months, fuelling concerns about the government’s fiscal trajectory and the broader impact on global debt markets.

Election Outcome and Market Expectations

Investors fear that aggressive fiscal promises, including proposals to suspend the 8 % consumption tax on food and elevated social spending, could worsen Japan’s already high debt burden — the largest among advanced economies — and further destabilize borrowing costs. However, analysts argue that a decisive show of voter support for Takaichi’s Liberal Democratic Party (LDP) and its coalition partner, Japan Innovation Party (Ishin), could be the best outcome for markets.

“An overwhelming majority would mean she doesn’t have to negotiate policy with opposition parties that advocate even deeper tax cuts or broader fiscal giveaways,” said one strategist, noting that such certainty could enable clearer market signaling and more disciplined policy adjustments.

Polls indicate the LDP‑Ishin coalition could capture around 300 out of 465 seats in the lower house, giving it a strong working majority that would reduce political uncertainty and allow more cohesive policy responses to market pressure.

Bond and Currency Market Volatility

The Japanese government bond (JGB) market has been particularly unstable, with yields climbing sharply after Takaichi called the snap election. Super‑long yields have hit multi‑decade highs, a move that increases borrowing costs for the government and raises broader risk premiums across financial markets.

Similarly, the yen’s sustained weakness has amplified import costs, contributing to public concerns about living expenses and inflation — key issues in voter discourse. The sensitivity of currency markets has put additional pressure on Japan’s financial officials and the Bank of Japan (BOJ), which has so far refrained from intervention despite warnings from policymakers.

Takaichi’s campaign trail remarks about the yen — which briefly unsettled markets — demonstrated the delicate balance between political rhetoric and investor confidence. Finance bureaucrats were reportedly forced into rapid damage control to reassure markets and international partners that Tokyo remains committed to exchange rate stability.

Analysts’ View: A Stable Mandate, Better Market Outcomes

Despite concerns over fiscal expansion, analysts suggest that a strong electoral mandate might actually allow Takaichi to moderate her policy promises and pivot toward a more market‑friendly stance once the dust settles. With fewer constraints from opposition parties, Tokyo could adjust spending plans or recalibrate tax‑cut packages to address bond and currency volatility.

That scenario, while not eliminating all risks, may offer a clearer roadmap for Japan’s fiscal and monetary trajectory. “Decisive wins remove a lot of the guesswork,” one strategist noted, adding that markets typically reward political clarity even when policy direction remains contested.

Looking Ahead

Japan’s election is now just days away, with both domestic and international investors closely monitoring developments. Takaichi’s performance among young voters, her campaign’s social spending pledges, and global geopolitical factors all stand to influence both the ballot and market reactions in the immediate aftermath.

While a decisive victory could calm nerves in the bond and yen markets, uncertainty remains over how Tokyo will balance fiscal stimulus with long‑term debt sustainability. The post‑election period — and the policy adjustments that follow — will be critical in shaping Japan’s financial outlook for the rest of 2026 and beyond.