Japanese Election Result Should Boost the Economy and Ultimately the Japanese Yen

Sunday’s decisive electoral victory for the Liberal Democratic Party (LDP) in Japan’s Lower House elections led to a more than 2% rally in Japanese equities today, driven by expectations of fiscal stimulus. Meanwhile, Japanese government bonds (JGBs) and the Japanese yen (JPY) remained largely unchanged, as Prime Minister Sanae Takaichi reaffirmed a commitment to support the yen. This outcome aligns with our view that the proposed policy mix is positive for the Japanese economy and, ultimately, the yen. However, a stronger yen poses a greater headwind for large-cap Japanese equities, given their higher exposure to foreign demand. As a result, we prefer to express our positive outlook on Japan through strategies less sensitive to JPY appreciation, such as Japanese small-cap equities, private equity buyouts, and activist strategies.

The election results represent a resounding win for Takaichi, with the LDP alone winning a two-thirds supermajority in the Lower House. Together with their coalition partner, the Japan Innovation Party (JIP), Takaichi now effectively controls 76% of Lower House seats. While the LDP does not have a majority in both houses, the Lower House supermajority enables the LDP/JIP coalition to override any opposition from the Upper House.

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