Key takeaways:
- The Liberal Democratic Party (LDP) achieved a decisive supermajority in Sunday’s snap general election, which should support stable policy implementation across a range of areas, boosting economic growth.
- Economic fundamentals remain supportive; mild inflation, domestic consumption, and strong corporate earnings could lead to Japan’s first projected primary surplus in 32 years.
- Despite resilient fundamentals and attractive valuations, Japanese equities remain underweighted in many investor portfolios. The landslide victory delivers much needed stability and predictability, suggesting the potential for a stronger‑than‑expected market environment to persist.
A much-needed decisive win for the LDP
The House of Representatives election held over the weekend delivered a historic landslide victory for the Liberal Democratic Party (LDP), significantly surpassing market expectations.
Before the election, the ruling coalition barely maintained a majority, with the LDP holding 198 seats and Ishin (Japan Innovation Party) 34 seats—for a combined 232—only exceeding the halfway threshold when counting independents.1
In contrast, yesterday’s election saw the LDP alone secure 316 seats, surpassing the two‑thirds mark, and when combined with Ishin’s 36 seats, the ruling bloc had 352 seats in total, representing 76.1% of all seats.2
Prior to this, the LDP’s standout major victories were the 2005 “Postal Dissolution” election (when former PM Junichiro Koizumi called a snap general election when the parliamentary upper house rejected legislation to privatise Japan’s postal system), and the 2012 general election that ushered in the second Shinzo Abe administration. In those years, the party captured a decisive 62% and 61% of total seats, respectively. The current 68% seats win for the LDP far exceeds both precedents, and constitutes an emphatic mandate for Prime Minister Sanae Takaichi’s administration.
Takaichi’s strong mandate should accelerate policy implementation
With this outcome, the Takaichi administration is positioned to govern with more stability over the next four years, and is expected to proceed with its policy implementation plans without material friction.
Investment aimed at strengthening Japan’s industrial base and national defence remains at the core of the government’s agenda. We expect such initiatives to stimulate economic activity across a broad array of sectors.
Additionally, despite advocating a “responsible, proactive fiscal stance,” the administration proposed a two‑year moratorium on consumption tax for food items during the election campaign, with cross‑party discussions expected to accelerate its implementation. And while the administration may be compelled to demonstrate progress on this pledge, the finance minister has commented that revenue sources to offset the consumption tax break need to be identified, reducing concerns that fiscal sustainability could be undermined.
With expectations for key supportive factors such as mild inflation, strong corporate earnings, and resilient household consumption, the primary balance (government’s total tax revenues minus total expenditures) is projected to return to surplus in the next fiscal year for the first time in 32 years.
What are the implications for Japanese government bond yields, the yen and consumption?
While some observers link the rise in Japanese government bond yields (JGB) to increased fiscal concerns, we view the 10‑year JGB yield moving into the 2% range—amid Consumer Price Inflation (CPI) stabilising around the higher side if 2% —as part of a broader normalisation of interest rates, rather than a sign of fiscal distress.
On the currency front, back in October 2025, when Takaichi was first voted in as prime minister, concerns around the proposed expansion of the fiscal deficit led to the Japanese yen weakening against the US dollar. However, coordinated intervention by Japan and the US has been hinted around maintaining the yen to dollar rate in the upper ¥150 levels, materially lowering the likelihood of further yen depreciation beyond that range.3 Meanwhile, as moderate inflation becomes entrenched, both corporates and households are increasingly conscious of the opportunity cost of holding cash, supporting our expectation that domestic demand can remain robust.
Why should investors reassess their allocations to Japanese equities now?
As mentioned earlier, since the early 2000s, the LDP achieved landslide victories under the Koizumi administration in 2005 and the Abe administration in 2012.
Past performance is not a guide to the future, but in both instances, the TOPIX and Nikkei indices rose by more than 30% (in yen terms), over the subsequent five months,4 supported by strong inflows from foreign investors.
While replicating those returns may prove challenging this time—given that Japanese equities have already performed well—the backdrop is similar. Despite resilient fundamentals and attractive valuations, Japanese equities remain underweighted in many investor portfolios.
We believe the landslide victory has delivered much needed stability and predictability for Japan, suggesting the potential for a stronger‑than‑expected market environment to persist. Coupled with ongoing improvements in corporate governance and shareholder value, the long-term investment case appears more compelling than ever.
IMPORTANT INFORMATION
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
1,2 JP Morgan Japan Equity Strategy; 9 February 2026.
3 CNBC; Asia Politics; 9 February 2026.
4 Bloomberg; NKY Index, TPX Index; price returns from 9 December 2005 to 31 March 2006 and 14 December 2012 to 17 May 2023 in yen terms. Past performance does not predict future returns.
TOPIX is a free-float adjusted market capitalisation-weighted index and is used as a benchmark for investment in Japanese stocks. The Nikkei Index, also commonly referred to as the Nikkei 225, is the most recognised Japanese stock market index. It comprises Japan’s top 225 companies that are listed on the Tokyo Stock Exchange.
Corporate governance: A set of rules, practices, and processes used to run and control a company. This includes key areas such as environmental awareness, ethical behaviour, corporate strategy, compensation, and risk management.
Consumer Price Inflation (CPI): A measure that examines the price change of a basket of consumer goods and services over time. It is used to estimate inflation, ie. the rate at which the prices of goods and services are rising in an economy.
Fiscal policy: Fiscal measures are those related to government policy regarding setting tax rates and spending levels. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes. A fiscal deficit occurs when a government spends more money than it earns in revenue.
Fundamentals: Information that contributes to the valuation of a security, such as a company’s earnings or the evaluation of its management team, as well as wider economic factors.
Japanese government bond (JGB): A debt security issued by the Japanese government, offering fixed interest payments until maturity and used as a tool for Japan’s central bank to control inflation and interest rates. The JGB yield is the annual return an investor expects to receive on debt securities issued by the Japanese government. It represents the cost of borrowing for the Japanese government. When JGB prices rise, yields fall, and vice versa.
Japan primary budget balance: A key gauge of the extent to which policy measures can be funded without resorting to debt. It measures the difference between the government’s total tax revenues and its total expenditures, excluding interest payments on outstanding debt. The government aims for a primary balance surplus to address its massive public debt-to-GDP ratio.
Valuation: An estimation of the current worth of an asset based on future performance and current financial data.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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