The LDP’s landslide victory in Japan is positive for risk assets

Prime Minister Takaichi’s decision to leverage her popularity for her party turned out to be successful. The landslide victory will reinforce her responsible but expansionary fiscal spending and a more Japan-focused foreign policy.  Risk-on sentiment will dominate the market for now.

The LDP coalition is expected to win a super majority in the Lower House

According to NHK reports, the Liberal Democratic Party (LDP) is predicted to take 273 seats and the LDP’s partner, Ishin, to take 24 seats in the Lower House, as of 23:30 pm local time. The exit polls suggested that the LDP is highly likely to obtain a majority on its own, and together with its coalition, it is likely to secure a two-thirds majority – enough to override Upper House vetoes. The coalition's win will give Takaichi more freedom in policy decisions and strengthen her ability to pursue economic and foreign policy goals.

The LDP coalition is likely to secure a super-majority

Source: NHK, local surveys, ING estimates

Risk-on sentiment to dominate Japanese asset markets in the near term

While awaiting the results, Takaichi spoke on television, emphasising the importance of fiscal sustainability. She mentioned that she would speed up discussions on reducing the food tax. Additionally, Takaichi clarified that her comments about the weak yen had been taken out of context and stated she aims to build an economy resilient to FX fluctuations. Finance Minister Katayama has begun reassuring markets, but concerns will remain about aggressive fiscal expansion.

Today's election results will likely boost local equities but weigh on Japanese government bonds and the yen as we argued in our recent Japan election preview article.

JGB yields may exceed the latest high of 2.38% soon (currently at 2.23%) due to spending concerns. However, authorities intend to ensure that no additional bonds will be issued to fund the two-year food consumption tax reductions. If they can show their ability to implement this plan, it may provide some reassurance to the market and limit the pace of rate hikes. Nevertheless, it is our assessment that while this measure may moderate the pace of yield rise, it is unlikely to alter the overall trajectory of rising yields, as we believe that we will see more fiscal spending in defence and capex investment in AI and digital transformation. Also, the fiscal stimulus with solid wage growth will set inflation expectations higher, which will push up yields further.

On the JPY, we anticipate that the USDJPY will approach the 160 level once more, though there will likely be a struggle between the market and the authorities near the 159 mark. However, once the rate differentials begin to narrow, then the USDJPY is expected to change its course to appreciate in the second half of 2026.

The Bank of Japan aims to balance inflation and growth

The Bank of Japan faces a challenging situation. The weakness in the yen could drive up inflation through more expensive imports, and quickly rising yields may strain the economy by increasing borrowing costs for both households and businesses. We remain cautious about the idea that the LDP's overwhelming victory will necessarily speed up the BoJ's rate hikes. Over the coming months, it will be important to monitor economic data and closely follow the BoJ’s communication. Nevertheless, we continue to expect the BoJ to maintain its gradual approach to raising rates and see a 25bp hike in June.

We believe that core inflation will stay above 2% but the very near-term inflation trend is expected to cool due to base effects and expansion of social welfare programmes. The Bank of Japan will likely wait to see if Shunto wage growth exceeds 5% again and results in significant price movement in April. Additionally, the BoJ will be more attentive than before to the impact of higher yields on the economy and tightening financial conditions. For now, we think that a rate hike is more probable in June than in April.

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