Historic victory of the Liberal Democratic Party suppresses political noise! Market gives "trust dividend": Japanese stocks soar, Japanese yen and Japanese bonds stabilize.

On Monday, following a historic single-party landslide victory by the Liberal Democratic Party (LDP) in the House of Representatives election, the previously volatile Japanese stock market surged to new historical highs, while the performance of the yen and Japanese government bonds appeared much calmer than many had feared in terms of fiscal sustainability. The market's reaction to the election results indicates that investors are willing to give Prime Minister Sanae Takaichi and her LDP party a certain "trust dividend," betting that the supermajority they have obtained will bring policy clarity and reduce the risk of the worst fiscal scenarios. In the House of Representatives election held on February 8, the ruling coalition consisting of the LDP and the Nippon Ishin no Kai party obtained a majority of seats. The data shows that the LDP won 316 seats, while Nippon Ishin no Kai won 36 seats. The LDP secured a two-thirds majority in the 465-seat House of Representatives. With this "supermajority," the ruling coalition led by Sanae Takaichi will find it easier to pass legislation. Frederic Neumann, Chief Economist for Asia at HSBC Holdings, stated, "The LDP's big win in the election will inject strong momentum into the stock market." He pointed out that Sanae Takaichi has gained stronger governing authority, which will help implement structural reforms that could boost productivity and corporate profits. "More importantly, a vast governing majority should also ensure relatively restrained fiscal spending, thereby lowering the risk of volatility in the bond market." This view is gradually gaining acceptance among investors. Many believe that the election results have reduced political noise rather than immediately triggering a wave of fiscal spending. Although the long-term Japanese government bond yields rose briefly on Monday, they quickly retreated, easing concerns that had caused disorderly selling in the Japanese bond market earlier this year. The yen also briefly rose by 0.6% to 156.22 yen against the dollar, further distancing itself from the 160 yen threshold that had previously prompted Japanese authorities to intervene. Statements from policymakers have also helped stabilize market sentiment. Japanese Finance Minister Katsuei Hirasawa emphasized that the proposed consumption tax cut would be limited to two years, only apply to food, and not be funded through additional borrowing. Meanwhile, Sanae Takaichi also stressed that she would pursue responsible and proactive fiscal policies. Sree Kochugovindan, Senior Research Economist at Aberdeen Investments, said, "The LDP's overwhelming victory does not mean that Sanae Takaichi can go on a spending spree. The LDP is relatively conservative on fiscal matters, and Sanae Takaichi has always been very mindful of the feelings of bond investors." Kazuhiro Sasaki, Research Director at Phillip Securities Japan Ltd., noted that the opposition parties had hardly made any gains in this election, meaning that "a permanent reduction in the consumption tax is nearly off the table, which is a huge positive for the bond market and also supports the yen." Bulls have taken note of this change. After the election, the Morgan Stanley strategy team raised its year-end target for the Nikkei 225 index to 61,000 points, citing increased expectations of political stability. Additionally, analysts believe that sectors like defense and semiconductors, which are likely to benefit from Sanae Takaichi's spending plans, could see further gains. Amir Anvarzadeh, Japan Stock Strategist at Asymmetric Advisors, said, "From a stock market perspective, the overwhelming victory of the LDP is ideal as it eliminates a lot of political uncertainty that has been plaguing the ruling party since the assassination of Shinzo Abe." However, traders also realize that Japan's room to maneuver on fiscal and monetary policy is narrowing bond and foreign exchange markets will react swiftly if spending plans appear to lack funding sources or if inflation pressures intensify. Looking ahead, the market will focus on whether the election momentum can quickly concrete policy actions. Parliament could convene a special session as early as February to begin discussions on the fiscal budget for 2026. As details of its fiscal expansion plan become clearer, Kazuhiro Toyoda, Head of Japanese Equities at Schroders Global Investment Management, said, "Volatility in the bond market could rise again, and I do not believe that the stock market will start on a simple, one-way upward path now." Attention will also be on U.S.-Japan relations. Sanae Takaichi plans to meet with U.S. President Donald Trump at the White House on March 19, and topics of discussion may include defense spending and investment commitments under Japan's $550 billion investment pledge. For now, at least, the market has found solace. David Chao, Global Market Strategist for Asia Pacific at Schroders, said, "Sanae Takaichi's decision to call a snap election has clearly paid off. The combination of political stability, policy continuity, and space for reform choices is likely to be seen positively by the market, further reinforcing a constructive view on Japanese risk assets."