🔎🗳️Eastspring's View: The Impact of Sanae Takichi’s Historic Election Victory 🗾✅

Sanae Takichi’s overwhelming victory has given the Liberal Democratic Party (LDP) a rare single-party supermajority, allowing her government to push forward pro-growth, defense, productivity, and corporate governance reforms with almost no political resistance. This increases policy predictability and further solidifies Japan's reflation and corporate governance reform investment narrative, providing a positive backdrop for investors overall.

Japanese Prime Minister Sanae Takichi led the Liberal Democratic Party to a historic win in Japan's House of Representatives, securing at least 316 seats. The LDP now holds a supermajority, giving it full control over all standing committees of the parliament and the ability to override the Upper House's decisions despite not holding a majority there.

Our chief economist, Ray Farris, believes this election victory will positively impact Japanese equities. Takichi is now more likely to shift fiscal policy towards a more expansionary stance, including cutting Japan’s consumption tax and providing fiscal support to defense and strategic industries. Such expectations have already supported the performance of our preferred Japanese value stocks, with Bloomberg’s relevant index rising 3.1% since Takichi announced the election on January 23, only slightly below the 3.4% gain seen in momentum stocks.

Japanese Value Stocks Outperforming the Market

Source: LSEG Datastream

We expect earnings forecasts for 2027 to start rising. While the new government can pass supplementary budgets, the most likely scenario is that the consumption tax cut will take effect in April 2027. Sanae mentioned discussing potential tax cuts around mid-year and submitting relevant measures in October. One potential cost of these additional stimulus measures could be a rise in Japanese government bond yields. We anticipate the 10-year JGB yield will break above 2.4% within the next few quarters. In our recent weekly reports dated November 2025 and January 2026, we noted that the recent rise in JGB yields primarily reflects adjustments in market expectations, with inflation anticipated to remain above 2%. New fiscal stimulus will support underlying inflation trends, even though the consumption tax cut at the beginning of FY2027 will temporarily reduce headline inflation. However, this could also threaten or even reverse the recent downward trend in public debt.

Inflation vs. 10-Year Term Premium

Source: LSEG Datastream, February 6, 2026

The combination of rising inflation and concerns about public debt could potentially weigh on the yen. The Bank of Japan (BOJ) and the Federal Reserve conducted a rate check on January 23 at around ¥158.50, which may limit near-term upside for USD/JPY. However, markets will focus on guidance from two policy fronts:

1) Will Sanae Takai emphasize 'responsible' or 'proactive' aspects of her 'responsible and proactive fiscal policy'? She stated that she wants any consumption tax cut to avoid increasing deficit-financed bond issuance. However, proposals regarding funding sources remain vague, focusing mainly on utilizing unrealized gains from Japan’s foreign exchange reserves. If the scale of stimulus is large and hedging funds insufficient, it would negatively affect the yen.

2) Whether the Bank of Japan will respond with a hawkish stance to signals of fiscal expansion. The market currently reflects only about a 51% probability of a 25-basis-point rate hike at the April monetary policy meeting. Given that Japanese companies' annual price-setting is concentrated in April, we believe the Bank of Japan is more likely to wait until May, when April's CPI data is released, to raise rates in June. However, any signal of an earlier rate hike in April would be supportive for the yen.

We currently expect the yen to remain on the weaker side and eventually retest the level of 160 against the dollar. Key points of Takai’s campaign include cutting consumption tax and implementing aggressive defense policies. Her overwhelming victory provides a clear mandate to push these policies forward, which may require a more hawkish monetary policy to balance and support the yen.

Investment Insights from the Japan Equity Team

This morning's market reaction essentially mirrored the situation when Koichi achieved an unexpected victory in the LDP election in early October last year. As of 10:30 a.m. today, the Nikkei 225 Index rose by 4.4%, TOPIX increased by 2.3%, and the MSCI Japan Index climbed by 2.6%. Amid overall positive market performance, artificial intelligence/semiconductor and defense-related sectors once again became the leading performers.

Looking ahead, we believe that in the absence of exogenous shocks, overall market sentiment is likely to remain optimistic, with policy support and certainty becoming stronger tailwinds. While the market may continue to favor investment themes related to artificial intelligence/semiconductors and defense, another potentially undervalued area is the increasingly stringent and tightened corporate governance requirements.

Companies may face greater pressures, including: cross-shareholding, low return on equity, low price-to-book ratios, and insufficient board independence. Companies may also sell low-return assets to optimize their portfolios. Against the backdrop of recent corporate profit margins nearing historical highs, this could drive an increase in share buyback activity.

In summary, although the election results may bring a new wave of market optimism, we believe there are still several positive factors, including real wage growth, strong corporate earnings, and corporate governance reforms, further supporting our constructive view on the Japanese market and related investment strategies.

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