Japan's ruling coalition wins more than half of the seats in the House of Representatives election, and the Japanese yen and Japanese debt are under pressure

# Source: Wall Street News

# By Long Yue

Japan's ruling coalition won a majority of seats in the House of Representatives election. The result has eliminated political uncertainty in Japan, strengthened market expectations for fiscal stimulus policies, reignited hopes for the "Takaichi trades", and driven a sharp surge in Nikkei 225 index futures. However, the prospect of expansionary fiscal policy has pressured the Japanese yen to trade near 157.61, exposed Japanese government bonds to selling risks, and led the market to ramp up bets on a rate hike by the Bank of Japan (BOJ) in April.

With the outcome of Japan's House of Representatives election settled, the ruling coalition's victory has triggered strong market expectations for fiscal stimulus, pushing stock index futures higher while weighing on the yen and Japanese government bonds, and bringing the "Takaichi trades" back into play.

According to a Xinhua News Agency report on February 9, in the just-concluded Japanese House of Representatives election, the ruling coalition consisting of the Liberal Democratic Party (LDP) and the Japan Innovation Party secured a majority of seats. The result has cleared political hurdles for Japan's incumbent government to implement its economic agenda, and the market has responded swiftly, with investors betting that a new round of fiscal spending will boost Japan's economic growth.

Boosted by the election result, the financial market has shown a clear "risk appetite" pattern. Nikkei 225 index futures rose by about 3% at one point in early Tokyo trading, extending the strong performance of Japan's stock market so far this year. Investors widely expect that the spending-increase policies advocated by Sanae Takaichi will directly benefit the stock market, especially the defense and technology-related sectors.

The foreign exchange and bond markets, however, are under pressure. The USD/JPY exchange rate weakened to near 157.61 in early Asian trading on Monday, approaching the 160 level that previously prompted intervention by Japanese authorities. Meanwhile, Japanese government bonds face the risk of further sell-offs as the market fears the government's expansionary fiscal policy may exacerbate the debt burden, and global fund managers had already cut their exposure to Japanese government bonds ahead of the election.

## Takaichi Trades to Dominate the Stock Market

As the ruling coalition secured a majority of seats, analysts believe the so-called "Takaichi trades" are likely to become the dominant market logic on Monday. The Tokyo Stock Price Index closed at a record high on Friday and has risen by more than 8% so far this year, far outpacing the roughly 2% gain of developed market stock indices.

Tim Waterer, Chief Market Analyst at KCM Trade, said: "Overall, the election result is welcome news for the Nikkei index, as it is a clear outcome and Sanae Takaichi's stimulus policies now have a clearer political path forward."

In the equity market, the most watched sectors include defense and nuclear energy, which align with Sanae Takaichi's national investment agenda. Gerald Gan, Chief Investment Officer at Reed Capital Partners in Singapore, noted: "Japan's stock market is poised for a rebound on the back of this victory. Sectors where Sanae Takaichi wants to increase spending, such as the military, artificial intelligence and semiconductors, are likely to be the biggest beneficiaries."

## Yen Nears Intervention Threshold, JGBs Face Selling Risks

In the foreign exchange market, the Japanese yen traded in a narrow range in early Asian trading on Monday, edging down to 157.61 against the US dollar. The yen had fallen 1.6% last week and still hovers near the 160 level, which previously prompted direct intervention by Japanese authorities.

Neil Jones, Managing Director of Sales and Trading at TJM Europe, said in an email comment: "The natural direction for the yen will be further weakness. It seems the entire global FX market is expecting some form of official action."

The bond market is also under pressure. Japanese government bonds (JGBs) saw a sharp decline in January due to poor liquidity and concerns over Japan's fiscal sustainability. Global fund managers including Schroders Plc and JPMorgan Asset Management all reduced their holdings of JGBs, especially ultra-long-dated bonds, ahead of the election. Takaichi's proposal to temporarily cut the food consumption tax was one of the key drivers of the sell-off.

Rong Ren Goh, Fixed Income Portfolio Manager at Eastspring Investments, commented: "This is a favorable result for the LDP, although it was not entirely unexpected by the market. JGB yields and the yen have been consolidating ahead of the election in the past few weeks, so this outcome should now allow the market to trade back into the existing trends."

## BOJ Rate Hike Expectations Heat Up

Despite fiscal concerns, bond performance improved slightly last week, easing upward pressure on yields. Masanari Takada, Quantitative and Derivatives Strategist at JPMorgan Securities Japan Co., said: "While the result has heightened nerves among bond market participants, the LDP's current position is likely to give Prime Minister Sanae Takaichi political leeway to listen to the bond market's concerns."

Notably, during the vote count, Sanae Takaichi stated that her remarks on the benefits of a weak yen had been taken out of context, and reaffirmed her goal to build an economy that can withstand currency volatility.

At present, market focus has shifted to the policy path of the Bank of Japan. Overnight index swaps show that the probability of the BOJ raising interest rates by 25 basis points at its April meeting is about 75%, with full pricing in by June.

## Risk Notice and Disclaimer

The market is risky, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial conditions or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific circumstances. Any investment made based on this article shall be the sole responsibility of the user.