LDP secures a two-thirds supermajority
The ruling Liberal Democratic Party (LDP) won a decisive victory in the Lower House election held on 8 February, securing 316 seats (Figure 1). The result not only clears the simple majority threshold of 233 seats, but also delivers an absolute stable majority that allows the LDP to control committee chairmanships across all standing committees. Seat gains also exceeded the two-thirds threshold of 310 seats required to initiate constitutional revision (Figure 2).
The Asahi Shimbun reported on 1 February that the LDP–Ishin ruling bloc was on track to surpass 300 seats, with scope for further gains by the LDP. However, the final outcome represents a larger-than-expected landslide relative to pre-election polling across media outlets. An LDP victory was largely priced in, but the sweeping win is likely to fuel a renewed "Takaichi trade" from the start of the week, with a rise in share prices, weaker bonds, and a softer yen. The USD/JPY rose to around 157.50 by 5:30am, indicating a modest resumption of yen selling. The rebound since last week partly reflected perceptions of the prime minister's tolerance for yen weakness, but also appears to have largely priced in expectations of an overwhelming LDP victory.
With the 23 January high of 159.45 coming back into view, sensitivity to potential currency market intervention by Japanese authorities has also resurfaced. During election-night coverage, Finance Minister Satsuki Katayama said she was prepared to communicate with markets on Monday if necessary, probably in anticipation of a fall in bonds and yen weakness following the election. Further price action may emerge once Tokyo markets open, but moves in the currency market at this stage suggest that the election outcome has largely been factored in.
FIGURE 1: LOWER HOUSE SEAT DISTRIBUTION AFTER THE GENERAL ELECTION
Source: Various media reports, MUFG
FIGURE 2: SIGNIFICANCE OF SEAT COUNTS IN THE LOWER HOUSE
Source: Various media reports, MUFG
Will the consumption tax on food be eliminated?
The election outcome gives the LDP the numbers needed to move legislation smoothly through the Lower House. Markets are now likely to focus on what "responsible expansionary fiscal policy" actually entails. We expect near-term attention to center on how the government handles the consumption tax, which it has said will be taken up by a newly established National Council to accelerate deliberations.
Prime Minister Sanae Takaichi said in post-election interviews that she wants to reach a decision as early as possible on the LDP's pledge to set the consumption tax on food to zero for two years. Policy Research Council Chair Takayuki Kobayashi echoed that stance, saying the party would move the process forward by gathering views through a cross-party National Council and accelerating internal discussions toward a decision. The ruling LDP and Ishin remain short of a majority in the Upper House, which explains why the policy is being framed as "cross-party." Even so, the constitution grants primacy to the Lower House, meaning the LDP could proceed on its own following its landslide victory. The continued reluctance to commit explicitly to implementation likely reflects persistent dissent within the party itself.
Debate within the LDP could therefore matter more than Diet deliberations for key policy decisions. The party's supermajority majority may, paradoxically, make it easier to apply the brakes to fiscal slippage rather than accelerate it. Taking a slightly longer view, we see no reason at this stage to abandon our assessment that yen selling since the launch of the Takaichi administration is approaching a peak.
Attention likely to shift back to monetary policy
Market focus is also likely to return to the BOJ's policy outlook in the near term. The Summary of Opinions from the January meeting, released last week, included several views that pointed to openness toward an earlier additional rate hike. Remarks scheduled for 13 February by Policy Board Member Naoki Tamura, who is widely regarded as hawkish, will therefore attract close attention. Attention will also turn to personnel matters once the Diet reconvenes. A nomination to replace Policy Board Member Asahi Noguchi, whose term expires at the end of March, is likely to be submitted to the Diet shortly thereafter. A single board change is unlikely to alter the overall direction of Policy Board deliberations. However, the appointment will be watched closely given that it will be made under a Takaichi administration that has just secured a landslide election victory, raising the possibility that the choice carries a degree of signaling value.