Mar 12, 2026
China in the Year of the Horse: A stable trot or a brisk gallop
What does Japan’s election result mean for investors?
In one of post-war Japan’s largest electoral victories, the Liberal Democratic Party (LDP) won 316 out of 465 parliamentary seats, securing a higher proportion of representatives in the lower house than any other party since 1945. Critically, this represents a two-thirds supermajority, and together with coalition partner Ishin, the ruling bloc dominates with 352 seats. What does this decisive victory mean for the Japanese economy, markets and investors?
The LDP won a supermajority in the lower house by itself
Seats in the House of Representatives
Sources: Bloomberg Finance L.P., J.P. Morgan Private Bank. Data as of February 2026. CRA = Centrist Reform Alliance.
This victory represents a stunning turnaround just seven months after the LDP lost control of both houses of parliament. The legislative benefits of the supermajority cannot be understated. With a supermajority in the lower house, the party can override the opposition-controlled upper house on virtually all ordinary legislation, though constitutional changes such as a revision to the nation’s pacifist constitution (Article 9) requires approval of the upper house (where the LDP is much weaker) and a national referendum – which may take years to implement. In the near-term, investors are more focused on the impact of the administration’s ambitious fiscal policies.
The cost of dealing with cost-of-living
One of the leading issues in this election has been cost-of-living, as consumers are struggling with one of the most persistent bouts of inflation in a generation amid anemic real wage growth. Takaichi has supposedly promised cost-of-living relief involving a temporary two-year suspension of the 8% consumption tax on food and non-alcoholic beverages. This policy could create a 5 trillion yen annual revenue shortfall (about 6% of total tax income). Other fiscal initiatives include higher defense and AI spending, stricter immigration rules, and a more assertive foreign policy.
Markets have repeatedly signaled their unease with this aggressive fiscal expansion through higher Japanese Government Bond (JGB) yields and a weaker yen. Japan has one of the highest debt-to-GDP ratios in the world at over 230% and already spends about a quarter of its budget on debt servicing, and yet JGBs trade at a similar yield to economies with stronger fiscal fundamentals.
Long-term yields are still too low given Japan’s massive debt pile
30-year government bond yield (%) vs general government gross debt (% GDP)
Sources: International Monetary Fund, Bloomberg Finance L.P. Data as of 2024 for debt figures, January 2026 for government yields.
However, as PM Takaichi gave her first remarks after the electoral victory, it became clear that she’s aware of and trying to address key market concerns. Her exact campaign promise was to expedite discussions at a parliamentary panel and gather cooperation from opposition parties, meaning that the actual implementation of this policy will likely take time. She also emphasized the ”responsible” part of “responsible, proactive fiscal policy”, and reiterated plans to avoid issuing bonds to fund the tax suspension and seek other revenue streams or savings.
Going forward, the administration will likely face a tough balancing act managing its spending ambitions and associated market reactions resulting in a weaker yen and higher JGB yields. If the currency weakens by too much, the erosion of consumer purchasing power could outweigh savings from the tax suspension, which would undo much of the work to improve the cost-of-living issue for voters. The brisk pace of fiscal expansion on top of the highest debt burden in the G7 will likely still cause investors to require a higher risk premium on Japan’s government bonds and currency.
Investment implications
Fixed Income
For JGBs, we expect the structural rise in yields across the curve to continue and would therefore caution against taking long positions. For the short end (<10 years), ongoing policy normalization – namely, rate hikes – should likely continue to support higher yields. The long end is likely to be pushed up by structurally higher term premiums. Markets have repeatedly signaled unease; 20 year+ JGB yields spiked to multi-decade highs when Takaichi’s tax plan was first unveiled.
Within Japanese fixed income, we are focused on Japanese banks as primary beneficiaries of curve steepening through net interest margin expansions. We are neutral on the popular Japanese life insurers sector due to the mixed impacts of stronger equities and weaker bonds on their investment portfolios, though we see buying opportunities on any weakness in this core, high-quality sector.
Currency
On the currency, the trajectory of USDJPY has diverged from interest rate differentials in a seemingly sustained and significant manner. This is unprecedented, given that moves in interest rate differentials historically accounted for about 80% of the pair’s movements. The last major episode of divergence in 2024 persisted only for a few months and was primarily driven by a substantial buildup in carry trade positions, supported by wide carry and subdued volatility in the global FX market. That episode ultimately concluded with a sharp carry trade unwind in the summer of 2024. In contrast, the depreciation observed since mid-2025 has not been driven by positioning, as the buildup in carry trades has remained relatively limited. This shift suggests that USDJPY is moving away from its traditional drivers, with price action now exhibiting heightened sensitivity to fiscal risks. Therefore, we do not expect the yen to meaningfully strengthen from current levels. Should the authorities continue to demonstrate a firm resolve in defending the 160 “line in the sand,” the pair is expected to remain capped just below that level.
The yen has been weakening despite narrower rate differentials, suggesting a shift in near-term market drivers
Sources: Bloomberg Finance L.P., J.P. Morgan Private Bank. Data as of February 2026.
Equities
This election outcome leans positive for Japanese equities (which have significantly outperformed global markets this year) as greater fiscal spending and a weak yen can feed into higher earnings growth. However, valuations are full at a forward P/E of 17.4x, a level last seen before the global financial crisis. As such, we remain tactically neutral at the index level and prefer select opportunities in sectors that can benefit from policy initiatives.
Japanese equities continued their rally this year after already strong performance last year – valuations now appear full
Year-to-date price return, %
Sources: Bloomberg Finance L.P. Data as of February 2026.
We are constructive on financials and banks in particular with rates likely biased higher. We see opportunities in tech and industrials as beneficiaries of continued AI capex, growing U.S. industrial demand and domestic policy support. We are not recommending any defense-related companies at the moment due to stretched valuations and minimal direct exposure to the theme.
KEY RISKS
All market and economic data as of February 2026 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
Past performance is not a guarantee of future returns and investors may get back less than the amount invested.
JPMAM Long-Term Capital Market Assumptions
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Index Definitions:
SPX Index is the ticker symbol for the S&P 500 Index, a market-capitalization-weighted index tracking the performance of 500 of the largest publicly traded companies in the United States.
TOPIX is a Japanese capitalization-weighted index that tracks all domestic companies listed on the Tokyo Stock Exchange (TSE).
The MSCI World Index is a global equity index that includes large and mid-cap companies across 23 developed markets. It is a free-float adjusted market capitalization-weighted index.
Important Information
The LDP won 316 out of 465 seats, achieving a historic two-thirds supermajority. With Ishin, the ruling bloc holds 352 seats, giving the government a strong mandate to impact Japan’s economy and markets.
Cameron Chui
Executive Director, Asia Equity Strategist
Weiheng Chen
Global Investment Strategist
John Li, CFA
Head of Asia Fixed Income Credit Strategy
Published Feb 11, 2026
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