With Ms. Takaichi's large majority, she will have few obstacles in steering Japan's economic agenda.Keisuke Hosojima/The Associated Press
Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.
Beset by scandals, high costs of living and leadership churn, Japan’s Liberal Democratic Party looked like it was on the verge of collapse less than a year ago. But earlier this week, LDP leader Sanae Takaichi won a historic supermajority in the snap election, re-establishing a party that has governed Japan almost continuously since 1955.
Markets rejoiced. The Nikkei 225 index of Japanese equities jumped upward by almost 6 per cent to a record-high upon her victory. Japanese government bond yields, which were behaving erratically only a few weeks ago, have fallen back to their early January levels (remember: Yields down means prices up).
Of course, part of this reaction has more to do with the global environment than Japan itself.
It is no secret that asset managers were already eyeing the United States with increasing skepticism. The country’s rapidly expanding public debt, high equity price-to-earnings ratios and erratic foreign policy ruptured its darling-status in global portfolios. Even “Trump Always Chickens Out” traders, who made large gains by ignoring announcements from the White House, are now reconsidering. With little policy certainty in France, Germany or Britain, there are few truly safe havens for capital among the G7 right now.
In this context, it is no surprise that those in charge of our portfolios are seeking a bit of comfort and stability. What is Ms. Takaichi, the Prime Minister, offering that these investors seem to love?
For one, the size of her majority means that Ms. Takaichi has an almost unprecedented mandate to steer the country. Unlike Germany, which has struggled to implement its expansionary policies under Chancellor Friedrich Merz’s fragile coalition government, the LDP is not shackled by its coalition partner, the Japan Innovation Party. Policies put forward by the LDP can be implemented unilaterally and global crises can be tackled head-on with little squabbling.
Thus, investors in Japan can plan ahead without a detailed grasp of developments in domestic politics. Capital markets love certainty and the recent election in Japan has offered plenty.
Her election also means that the Japanese economy is about to get a sizable demand-side stimulus. Ms. Takaichi has promised a “pro-active fiscal policy shift,” cutting taxes on consumption goods, such as the 8-per-cent surcharge on food items, and increasing government investment in strategic sectors. This is a notable departure from the government’s previous policy of fiscal consolidation. A demand boost from the tax cut and subsidized investments will all show up in corporate books and thus are something shareholders can look forward to.
A woman walks past an electronic board displaying market information in Tokyo last week.Kim Kyung-Hoon/Reuters
Even bond markets, which initially responded with panic to Ms. Takaichi’s promise of tax cuts and additional spending, have calmed down. The Japanese 30-year government bond yield, which skyrocketed over 30 basis points upon the tax-cut announcement, has settled back to previous levels.
This seems in large part owing to her messaging. Ms. Takaichi quickly pivoted her rhetoric after the volatility, emphasizing that fiscal policy would be "responsible." She has also promised to search for alternative funding sources to cover some of the spending gap.
Fundamentals on Japanese government debt have not changed dramatically – tax cuts remain a core commitment and her funding plan is quite vague. But Ms. Takaichi has at least shown receptiveness to investor concerns. At the very least, she has not made the same mistake as Britain’s Liz Truss, whose government was toppled in 2022 by ignoring those very bond markets.
This is not to say that Ms. Takaichi can necessarily save the broader Japanese economy. After all, high equity values do not map one-for-one to higher GDP per capita. Japan remains heavily indebted (although, not as much as people think, as the Financial Times recently pointed out), and its aging population remains its most fundamental challenge to raising living standards. The Prime Minister’s platform addresses neither.
Clearly, Ms. Takaichi has no immediate plan to lower deficits. But the demographic problem is even more pressing. As research from economist Jesús Fernández-Villaverde and his co-authors points out, Japan’s multidecade lacklustre performance on a GDP-per-capita basis can almost entirely be explained by the decline in the working-age share of the population.
Here, the Prime Minister has turned away from the solution, promising to place additional restrictions on foreign nationals, rather than loosen them to find more workers. Thus, Ms. Takaichi’s election has something for both the bulls and the bears.
Nonetheless, from a purely financial standpoint, her win is a sigh of relief, at least in the medium term. In a world where many of the traditional safety nets are fraying, Japan and its investors stand ready to reap the gains.