Japanese markets have surged to record highs following the Liberal Democratic Party’s landslide victory in the Japanese snap election.
Prime Minister Sanae Takaichi’s (pictured) party won 316 of the 465 seats on offer, marking the largest number of seats won by a Japanese party in the post-war era.
The Nikkei 225 has risen 3.89% on the back of the result, which has given investors increased confidence in the political stability of the nation.
Aberdeen Investments head of Japan equities Hisashi Arakawa said the win gives the political room for Sanae Takaichi to advance her pro-growth agenda. This includes expansionary fiscal spending and increased investments in areas such as semiconductors, AI, energy security and defence, while Takaichi is also expected to suspend the 8% consumption tax.
See also: Will Takaichi help investors discover Japan’s growth potential?
However, bond yields have also risen on concerns over looser fiscal spending.
“Concerns over fiscal health could push interest rates higher and weaken the yen, raising funding and import costs for firms and potentially eroding profitability. Mitigating fiscal risks will remain a key challenge,” said Kei Fujimoto, senior economist at SuMi TRUST.
Aberdeen’s Arakawa added while there are short-term risks for investors, such as rising Japanese government bond yields and prevailing geopolitical tensions with China, the broader macroeconomic environment continues to work in Japan’s favour.
“Takaichi has also emphasised the need for responsible fiscal spending. Tailwinds of wage growth, resilient consumption and structural reforms are providing durable support for both the market and earnings.”
Naomi Fink, chief global strategist at Amova Asset Management, also said the election outcome may actually reduce tail risks for investors, as the result gives the Takaichi administration the option to take a more disciplined fiscal approach.
“In fact, Japan may have edged further away from the feared ‘fiscal dominance’ scenarios than it was prior to the election,” she said.
“It now simply remains up to Takaichi’s administration to act on this mandate.”
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