Japan: Takaichi’s LDP heading to absolute majority at snap election, possibly with stronger budget control

Prime Minister (PM) Takaichi called a general election on February 8th, by dissolving the Lower House on January 23rd. Her intention was to win an absolute majority as her Cabinet approval rate was elevated at 62% in January, jumping from 39% in September-25 just before former PM Ishiba resigned in October-25 (Chart 1). During the short election period, a potential reduction to the consumption tax became the focal point of the campaign. After opposition proposed to lower or to eliminate the tax, Takaichi’s Liberal Democratic Party (LDP) joined the bandwagon. As these proposals are likely to deteriorate Japan’s fiscal position, the bond market reacted negatively with the 10-year Japanese Government Bonds (JGBs) yield surging to 2.3%, the highest level in twenty-seven years, and the 30-year JGB yield all the way to 3.6% (Chart 2).Interestingly, public opinion surveys by major Japanese media suggest that the LDP is heading to win an absolute majority, which could be regarded as the most bond market friendly result. The LDP will have less need to negotiate policies with other parties, which should, in principle, stem off the need to offer fiscal goodies to keep the support of opposition parties. In that vein, and importantly, the LDP may not end up lowering the consumption tax rate, given the recent developments in the bond market. In fact, PM Takaichi promise was narrower than a full reduction in the consumption tax but rather to consider eliminating the consumption tax on food for two years.The risk to this scenario is Komeito’s vote for the Central Reform Alliance (CRA). If the LDP doesn’t succeed in winning an absolute majority, financial markets could respond negatively, pushing JGB’s yields even higher. This could also raise concerns about a potential intervention in the JGB market, especially after the verbal intervention on the Yen on January 23rd with the support of the Fed.  Within this scenario of lack of absolute majority, the LDP will have less bargaining power to negotiate policies with its coalition partner, Japan Innovation Party (JIP). Furthermore, the Democratic Party for the People (DPP), which was once considered as a potential partner, has a much more aggressive position on the reduction of the consumption tax from the current 10% to 5%, which would further deteriorate Japan’s fiscal balance.All in all, the LDP is reportedly keeping momentum to win an absolute majority at the snap election on Sunday. This could increase the LDP’s bargaining power to have more control over the budget, which could stabilize the bond market. Still, the risk of LDP gaining only a relative majority should not be underestimated.