The market reaction following Japan's election indicates that investors have temporarily granted Prime Minister Fumio Kishida a &#34;presumption of innocence,&#34; shielding him from the market turmoil that previously threatened his spending plans. With Kishida's Liberal Democratic Party (LDP) achieving the largest single-party victory since World War II in the House of Representatives election, the market bets that this overwhelming advantage will bring policy clarity and reduce the risk of worst-case fiscal scenarios.
On Monday, Japan's stock market soared to a historic high after the election results were announced, with the Nikkei 225 index surging by as much as 5.7% during trading, breaking through the 57,000-point barrier. Meanwhile, the performance of the yen and the Japanese government bond market was more subdued than many analysts had expected, avoiding the sharp fluctuations previously triggered by concerns over fiscal sustainability. This &#34;dual rise in stocks and currency&#34; indicates that the market is interpreting the election results as a removal of political uncertainty rather than an immediate signal for disorderly spending.
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The positive response from investors primarily stems from expectations of policy stability. In a speech on February 9, Kishida explicitly committed to not funding consumption tax cuts through the issuance of deficit bonds, but rather through non-tax revenue and subsidy reviews. This statement contrasts sharply with previous market concerns about his &#34;massive borrowing,&#34; and combined with the ruling coalition's &#34;supermajority&#34; seats, it has reinforced market expectations for policy continuity and controllability.
However, this trust may be fragile and short-lived. Traders remain acutely aware that Japan's fiscal and monetary policy leeway has narrowed. Analysts warn that if subsequent budget details reveal a lack of funding support for spending plans or if inflation pressures intensify, the bond and currency markets will react swiftly.
<h2>&#34;Kishida Trade&#34; Resumes, Stock Market Hits New Highs</h2>
Buoyed by the election results, Japan's stock market experienced a sharp rise as part of the typical &#34;Kishida trade.&#34; The Nikkei 225 index and the TOPIX both reached historic highs on Monday. JP Morgan's strategists, including Rie Nishihara, quickly raised their year-end target for the Nikkei 225 index to 61,000 points following the election, citing enhanced expectations for political stability.
HSBC's Chief Economist for Asia, Frederic Neumann, pointed out that the LDP's landslide victory will &#34;inject momentum&#34; into the stock market. He believes that Kishida has received a stronger mandate to implement structural reforms, which could boost productivity and corporate profits. Analysts generally agree that sectors benefiting from Kishida's spending plans, such as defense and semiconductors, may see a new round of gains.
Market participants noted that this victory has eliminated the political uncertainty that has plagued the ruling party since former Prime Minister Shinzo Abe's assassination. Amir Anvarzadeh, a Japanese equity strategist at Asymmetric Advisors, stated that from the perspective of the stock market, the LDP's overwhelming victory is highly favorable
<h2>Fiscal Discipline Commitment Eases Bond Market Concerns</h2>
Despite previous market worries that Kishi Sanae's expansionary policies would trigger a bond sell-off, the Japanese government bond market performed relatively steadily on Monday after policymakers issued a series of reassuring signals. Although longer-term Japanese government bond yields initially jumped, with the 10-year yield rising 4 basis points to around 2.27%, it quickly fell back, alleviating concerns about disorderly selling.
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The key turning point was Kishi Sanae's clarification of her fiscal path. In a speech on February 9, while emphasizing the need to free Japan from overly tight fiscal policies and insufficient investment, Kishi also made it clear that she would support tax cuts through non-tax revenue and cuts to unnecessary subsidies, rather than simply increasing the deficit. Previously, Finance Minister Satsuki Katayama also emphasized that the proposed consumption tax cut would be limited to two years and would only apply to food.
Sree Kochugovindan, a senior research economist at Aberdeen Investments, commented that the Liberal Democratic Party's overwhelming victory does not mean Kishi Sanae has gained &#34;freedom for arbitrary spending.&#34; He pointed out that the Liberal Democratic Party maintains a conservative stance on fiscal matters, and Kishi has been very attentive to the reactions of bond investors. Kazuhiro Sasaki, head of research at Phillip Securities Japan Ltd., also stated that the opposition's failure to make progress in the elections means that &#34;permanent cuts to the consumption tax are effectively off the table,&#34; which is a significant relief for the bond market.
<h2>Yen Unexpectedly Strengthens, Diverging from Typical Logic</h2>
In contrast to the typical &#34;Kishi trade&#34; that signals a weaker yen, the yen appreciated against the dollar on Monday, rising 0.6% to 156.22, further distancing itself from the 160 level that previously prompted intervention from Japanese authorities.
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Michael Wan, a senior currency analyst at MUFG, believes this unusual movement may reflect Kishi Sanae's commitment to fiscal sustainability post-election, as well as Finance Minister Katayama's comments about supporting yen stability and coordinating with U.S. authorities. Katayama stated earlier on Monday that actions could not be ruled out in response to rapid exchange rate fluctuations that deviate from fundamentals, including intervention in the foreign exchange market.
While Citi analysts believe the yen is unlikely to fall significantly below the 160 level, ING noted in a report that there may be a tug-of-war between the market and authorities around the 159 level.
<h2>Diplomacy and Long-Term Challenges: From the White House Visit to Budget Review</h2>
Looking ahead, market focus will shift to how Kishi Nobuo implements his &#34;bold measures.&#34; Kishi Nobuo has expressed a desire to visit the United States next month and is scheduled to meet with U.S. President Trump at the White House on March 19. Discussions between the two sides are expected to cover defense spending and investment commitments under Japan's promised $550 billion package plan. Kishi Nobuo emphasized that active fiscal policy will be key to his government's transformation, aimed at promoting investment in crisis management and cutting-edge technology.
Although the market has temporarily found comfort, the road ahead is not smooth. Kazuhiro Toyoda, head of Japanese equities at Schroder Investment Management, warned that as details of the fiscal expansion plan unfold, volatility in the bond market may rise again. The extraordinary Diet session is expected to convene as early as February to begin reviewing the budget for fiscal year 2026. Given that Japan is already the most indebted country in the world, with a debt-to-GDP ratio approaching 230% by 2025, any spending plans that appear to lack funding support could quickly reverse current market sentiment.
David Chao, global market strategist for the Asia-Pacific region at Invesco Ltd, summarized that the combination of political stability, policy continuity, and reform options may be viewed positively by the market, but this needs to be built on sustained fiscal prudence

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Despite Takemi Saito's commitment not to issue bonds to support tax cuts with a deficit and emphasizing fiscal discipline, under the backdrop of high debt, inflationary pressures, and exchange rate constraints, the fiscal and monetary leeway is narrowing. Any expansion of expenditures lacking funding sources may quickly trigger negative reactions in the bond and exchange rate markets

- Following Japan's election, investors have temporarily shown confidence in Prime Minister Fumio Kishida, interpreting the Liberal Democratic Party's significant victory as a sign of policy clarity and reduced fiscal risks.  
- The Nikkei 225 index soared to a historical high alongside a stable performance in the yen and bond markets, reflecting market optimism amidst prior concerns over financial sustainability.  
- However, analysts caution that this trust may be fragile, as incoming budget details could quickly influence market reactions if spending plans appear unfunded or inflation pressures escalate.

Wallstreetcn

Japanese stocks and yen both rise, Takashi Sato makes concessions, and the market chooses to temporarily believe!