Key Takeaways
- In a snap election, Japan’s prime minister, Sanae Takaichi, has secured a super majority for her LDP party in the lower house of the Japanese parliament.
- Opposition parties had looked strong in pre-election polls, but promises of economic stimulus resonated with an electorate frustrated with high food prices and stagnant wages.
- Japan’s equity markets have responded positively with both the Nikkei and Topix reaching all-time highs. Bond markets have been volatile as concerns persist over unfunded spending.
- We remain positive on the outlook for Japanese equities. Takaichi has a significant majority and will be able to push through her reform-led agenda.
This week we focus on the weekend’s Japanese elections. Prime Minister, Sanae Takaichi, secured a better-than-expected outcome for her Liberal Democratic Party (LDP), which now has a super majority in the lower house of the Japanese Parliament.
The election announcement was quick and unexpected with Takaichi having only been in power for three months. Very high personal approval ratings, and a hope that these would translate to her political party, provided impetus for the early election call. That decision has worked spectacularly well, not least because the outcome wasn’t guaranteed, according to pre-election polls. The result means the LDP alone has a supermajority (two-thirds of the seats in parliament), and combined with their coalition partner ‘Ishin’ (the Japan Innovation Party) have completely crushed opposition parties, who were looking quite strong in the opinion polls.
Markets are reacting very positively to a result that gives strong political certainty. The lower house is the most important house in the Japanese parliament, and a supermajority means policies from the upper house, where the LDP does not have a majority, can be overruled.
The outcome gives Takaichi the opportunity to implement her policies around economic stimulus. These initiatives, including higher spending and a new era of prosperity, have resonated with voters frustrated with high food prices and stagnant wages. There is now an expectation that campaign talk around a pause in some consumption taxes will be implemented.
Following the result we have seen the Nikkei and Topix indices trading at all-time highs. The Japanese yen has been quite weak recently and this trend may continue in the short term. Japanese government bonds have also seen some recent volatility and concerns may persist around unfunded spending, which does not go down well with bond markets. Takaichi may have won over the Japanese electorate, but winning over all financial market asset classes will likely take more time.
We remain positive on Japan and expect to see economic stimulus start feeding through into the real economy. This level of political certainty is quite rare in Japan and such a strong majority will make life relatively easy for Takaichi as she looks to push through her reform agenda. An investment-focused government looking to reform policies in order to boost growth, consumption and investment (particularly in the tech sector) should be supportive for Japanese equities. We need to be mindful of currency and bond market moves, but overall this is positive news for Japan. As a result, we remain overweight Japanese equities.
