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Market Highlights
Japan’s Prime Minister Takaichi led the LDP party to its largest victory in its post-war modern history in the February 2026 Lower House Elections. The LDP won a resounding 316 seats out of 465 in total, and surpassing the 300 seats last won by LDP under Prime Minister Nakasone in 1986. In addition, the LDP together with its coalition partner Ishin no Kai now have 352 seats in the Lower House, well surpassing even the two-thirds supermajority threshold.
This significant magnitude of the win is important as the LDP could pass legislation even if it is voted down in the Upper House where the LDP is in the minority. In addition, the LDP will be in full control of parliamentary operations and process, including the Budget Committee, and could also have enough seats to initiate a national referendum on revising the Japanese Constitution in theory.
The immediate post-election market move in USD/JPY was quite modest, rising to 157.79 at one point before moderating below the 157 handle at the time of writing. This of course has to be placed in context of the move up in USD/JPY already seen over the past 10 days from the trough of 152.0 post the speculated FX intervention by Japan’s MOF and rate check from the US Treasury. Beyond FX, equity markets in Japan rose sharply with Nikkei futures up by more than 6%, while JGB 10-year and 30-year yields rose by around 3-4 basis points.
The modest immediate market reaction in JPY FX markets can perhaps be attributed to a couple of factors, including: 1) a continued commitment by Prime Minister Takaichi to fiscal sustainability in post election comments, 2) comments from Finance Minister Katayama on a stable USD/JPY in coordination with US authorities, 3) greater political stability with the resounding victory by LDP, and with that perhaps a view by the market that fiscal expansion may not be as large as initially feared.
Whether this continues over the medium-term will depend greatly on how Prime Minister Takaichi chooses to utilise her dominant election mandate, including on the use of expansionary fiscal policy as a means to achieve a strong and self-sufficient Japan, whether she presses ahead with constitutional revision where past Prime Ministers including Abe were not able to do so on this front, and also the relationship with the Bank of Japan and broader monetary policy settings.
Moving forward, the Diet will likely be reconvened on 18 February, and the discussion in the Budget Committee likely around early March will be important for the trajectory for USD/JPY. In addition, markets may also get some sense of the relationship between BOJ and the new administration with the nomination of a successor to BOJ board member Asahi Noguchi, whose term expires at the end of March. Commentary from the Bank of Japan has been if anything turning somewhat more hawkish and indicative of a possible rate hike in the April meeting, including Bank of Japan Board member Masu Kazuyuki highlighting that BOJ policy rates are still below an estimated nominal neutral rate range of 1.00-2.5% right now.
Our global team is forecasting USD/JPY trending lower below the 150 levels by 2H2026, on the assumption of a April BOJ rate hike, continued commitment to fiscal sustainability by the new administration, coupled with lower US rates and with that a weaker Dollar moving forward.
