Japan wagers the world for growth

Whilst the Dollar may have ran away with the headlines in January, the Yen is worthy of almost equal scrutiny given the recent actions of Japan’s government.

On the 19^th Prime Minister Sanae Takaichi told the nation that a snap election would be held on the 8^th of February. Takaichi, struggling to get her expansionary fiscal plan of tax cuts and investment spending past her own party, is seeking to strengthen her position by increasing the thin majority the LDP holds.

Over the past year, polls have consistently returned that inflation is the top concern for voters, with the Yen’s 44% weakening against the Dollar over the past 5 years only intensifying the problem. Naturally, the start of this week was filled with rumour of USDJPY being debased, although Bessent nixed this yesterday.

But overshadowing even this, is the risk Takaichi is running if she does take a stronger majority as a green flag to charge on with her loosening of policy. Japan is the most relatively indebted nation in the world, much more so that the UK, that saw a Prime Minister ousted after playing too loose with the markets confidence.

It will be interesting to see the degree to which Takaichi is willing to push this envelope should she win and even more interesting to see how the market will react in turn. What’s more, Japan represents approximately 15% of global liquidity, being the home of the carry trade over the past decades. Takaichi wants rates to remain low, but if fiscal spending accelerates Japanese inflation further, it could become a very narrow tightrope.