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Focus on PM’s first public statement after election: Will efforts to realize campaign promises pick up or slow down?
Long-term andsuper-long-termJGB yield scenariofor February 9-13
We expect the 10-year JGB yield will spend next week digesting the outcome of the February 8 Lower House election. A sense of relief among investors may lead to a continuation of the buybacks seen in the latter part of this week. However, discussions regarding future economic and fiscal policy—particularly the two-year exemption of food products from the consumption tax, which Prime Minister Sanae Takaichi has described as a “long-sought goal” and expressed a desire to achieve by the end of FY26—have only just begun. The first item of interest will be the press conference held by Ms. Takaichi after the election outcome is revealed (most likely on the afternoon of February 9). Once the initial buybacks have run their course, market participants are likely to shift to a wait-and-see stance ahead of the policy speech and fiscal policy address at the extraordinary Diet session(scheduled to convene on February 18) and announcements regarding the make-up of the “National Conference.”
Surveys conducted by various media outlets in the final stage of the election indicate that the ruling coalition -- consisting of the Liberal Democratic Party (LDP)and the Japan Innovation Party, or “Ishin” -- is on track to win more than 300 seats, with an absolute stable majority for the LDP also a possibility (Nikkei, February 6).If the ruling coalition secures a two-thirds majority of 310 seats (Graph 2), it would be able to pass bills rejected by the Upper House, significantly reducing the need to rely on cooperation with the opposition to enact legislations. Thus, we think it would strengthen Prime Minister Takaichi’s position.
In last week’s report, we summarized potential market reactions to various election outcomes in the form of a “thought exercise,” as shown in Table 2. In Scenario A (a decisive win for the ruling coalition), we envisioned a potential resurgence of the “Takaichi trade,” characterized by rising stock prices, a falling yen, and falling bond prices. But this week the JGB curve has bull flattened on buybacks despite continued reports of solid momentum for the ruling coalition. Several explanations have been put forth, including the view that Prime Minister Takaichi could more easily resist opposition demands for expansionary fiscal policy if the ruling coalition achieves a major victory (Table 3) and the view that once the coalition has enough seats to form a stable government, there would be less need to swiftly implement the two-year exemption of food items from the consumption tax.
Nevertheless, we need to keep a close eye on the risk of fiscal expansion. Immediately after the launch of the Takaichi cabinet on October 21 last year, market participants breathed a sigh of relief upon seeing fiscal hawks such as Taro Aso and Shunichi Suzuki appointed to key LDP positions. However, subsequent discussions at the Council on Economic and Fiscal Policy regarding “responsible and proactive fiscal policy” and a “high-pressure economy” rekindled concerns about expansionary fiscal policy. In a press conference on January 19, Prime Minister Takaichi explained the rationale for dissolving the Lower House and calling a snap election as follows: “We need political stability to pursue -- without fear of criticism -- bold policies and reforms that may divide public opinion during the upcoming parliamentary session, which will last nearly six months.” It is widely known that among those “bold policies and reforms” is a major reorientation of economic and fiscal policy toward “responsible and proactive fiscal policy.”
For instance, Finance Minister Satsuki Katayama appeared on a TBS news program on February 4 to address criticism from economists regarding the proposed two-year exemption of food items from the consumption tax. She remarked, “The Prime Minister has stated that she wishes the consumption tax cut to be discussed by the National Conference, but she has been in favor of it for some time.” Ms. Katayama also said that “as the Prime Minister noted at her January 19 press conference, a consumption tax cut is explicitly indicated in the coalition agreement with the Japan Innovation Party” and that “intensive discussions will take place since the aim is to implement this measure within the current fiscal year.” While we do not expect any indication that election promises might be revised in the midst of the campaign, we think it would be natural for the ruling coalition to move forward with actions aimed at implementing its campaign pledges if it emerges victorious.
In this context, the first thing to watch next week will be the press conference held by Ms. Takaichi (who is also president of the LDP) once the election outcome is known, most likely on the afternoon of February 9. If the PM adopts a more guarded tone on the consumption tax cut -- for example, if she casts doubt on whether the measure will ultimately be implemented by saying that “We intend to carefully examine at the National Conference what the best approach might be, taking into account the various opinions voiced during the campaign” -- the long-and super-long-term sectors of the JGB curve are likely to see continued buy backs and test additional downside. Conversely, if Ms. Takaichi expresses a firm commitment to the measure and presents a clear deadline, saying that “Having received public support, we will accelerate discussions with the aim of exempting food items from the consumption tax by the end of FY26,” we would expect to see a bear steepening of the curve, reversing the flattening observed in the latter part of this week