Japan Stocks Rally to Historic Highs as Markets Welcome Takaichi Victory
The yen initially strengthened after a weaker first reaction, as investors processed headlines pointing to fiscal stimulus.
Quick overview
- The ruling coalition's unexpected electoral victory led to a significant surge in Japan's stock market, with the Nikkei 225 reaching record highs.
- Analysts are now focused on the Bank of Japan's potential interest rate hikes and the impact on the yen amid concerns over fiscal policy.
- Despite initial market reactions, there is speculation that the yen's recent strength may indicate increased political stability following the election.
- The coalition secured a strong mandate with 316 out of 465 seats, surprising both supporters and critics alike.
The strength of the ruling coalition’s victory surprised both supporters and critics. Looking ahead, uncertainty now centers on the yen and the stance the monetary authority will take in the first half of 2026.
Following the landslide electoral victory of Japanese Prime Minister Sanae Takaichi, markets welcomed the news and Japan’s stock market surged to record highs. At the same time, yields on most Japanese government bonds edged higher, while the yen posted a modest appreciation against the US dollar. Analysts now turn their attention to the Bank of Japan (BoJ) and whether it will follow through on its intention to continue raising interest rates this year.
Although Takaichi’s victory had been widely expected, the scale of the win surprised markets. Her coalition secured 316 of the 465 seats in the lower house, delivering a strong governing mandate. In this context, the Nikkei 225 rose 6.2% on the week, the 10-year Japanese government bond yield increased by 5 basis points to 2.2%, and the yen strengthened 1.3% against the dollar.
Once the initial market “shock” from the ruling party’s stronger-than-expected victory fades, analysts expect markets to regain composure. Attention is likely to shift toward fiscal policy, particularly efforts to avoid financing expansionary policy through higher government bond issuance or new consumption taxes. Despite the controversy generated during the campaign by her proposal to cut food taxes, the prime minister has since committed to a fiscally responsible policy framework.
Impact on the yen
The yen initially strengthened after a weaker first reaction, as investors processed headlines pointing both to increased fiscal stimulus and to continued vigilance by currency authorities, including the risk of intervention.
Analysts warn that if markets conclude that fiscal ambitions advance faster than the BoJ’s willingness to raise interest rates, the medium-term bias could again tilt toward a weaker yen, driven by a higher country risk premium. Despite the electoral surprise, markets continue to price in two interest rate hikes by late 2026.
However, an alternative interpretation suggests that the yen’s appreciation may reflect expectations that a frictionless supermajority in parliament will translate into greater political stability, offering temporary support to the Japanese currency.
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