Nick Goold
On February 8, 2026, Prime Minister Sanae Takaichi led the LDP to 316 seats out of 465 in Japan’s Lower House. That’s more than two-thirds — a supermajority. In Japanese politics, that’s a very powerful position.
She called the election early because the timing was favorable.
Takaichi did this to:
- Take advantage of recent popularity
- Take advantage of a weak opposition
- Secure a strong mandate before pushing bold policy
Why a Supermajority Changes the Market Picture
With more than two-thirds control, the government can:
- Pass budgets quickly
- Push through tax changes
- Override resistance from the Upper House
- Deliver policy without long delays
This reduces parliament risk — the risk that policies get blocked or watered down.
For markets, that means:
- Less political uncertainty
- More confidence that policy will actually happen
But potentially more volatility, because change can come faster.
Takaichi and the Abe Economic Model
Takaichi follows the economic approach of former Prime Minister Shinzo Abe.
Under Abe (2012–2020), Japan launched “Abenomics.” It was based on:
- Very easy monetary policy
- Government spending (fiscal stimulus)
- Corporate and structural reform
What happened during Abenomics?
- USD/JPY rose from around 80 in 2012 to above 120 by 2015
- The Nikkei 225 more than doubled from its 2012 lows
Why did markets move like that?
A weaker yen:
- Helped Japanese exporters
- Increased overseas profits when converted back into yen
Now, Takaichi signals a similar direction:
- Comfortable with a weaker currency
- Prefers low interest rates
- Supports business and industry
Markets see this as positive for Japanese equities — and potentially negative for the yen over time.
Fiscal Policy and the Yen
Takaichi supports tax relief, higher defense spending, and investment in AI and semiconductors to boost growth. But Japan’s debt is already around 250% of GDP, and more spending could mean larger deficits and pressure on bond yields.
She is also comfortable with a weaker yen, arguing it helps exporters and supports stocks, while critics say it raises import costs and hurts consumers. She prefers low interest rates and gradual policy shifts, which markets see as growth-friendly but unlikely to bring aggressive tightening from the Bank of Japan.
USD/JPY – Short-Term Outlook
USD/JPY is near historical highs and continues to trade with strong volatility and tight spreads — attractive conditions for active traders.
After testing the 159–160 area, the pair has pulled back toward the mid-150s. Positioning remains heavily short yen, which increases the risk of sharp moves if sentiment shifts.
If USD/JPY moves lower:
- 150 is a major psychological support level
- A break below 150 could accelerate carry trade unwinds
- When carry trades unwind, moves can become fast and exaggerated.
Potential strategies:
- Buy ahead of 150 if support holds and price stabilizes
- Be ready to sell if 150 breaks decisively and downside momentum builds
- Watch for oversold conditions below 150 that may create rebound opportunities once volatility settles
Long-Term Outlook – Why the Yen May Stay Weak
Over the long term, the yen is more likely to weaken gradually.
Japan has:
- An aging population
- Slow growth
- Very high government debt
Because of this, the Bank of Japan cannot raise interest rates aggressively without hurting the economy. Lower rates compared to the U.S. make the yen less attractive, so money tends to flow elsewhere.
This doesn’t mean USD/JPY rises in a straight line. There will be pullbacks and intervention spikes. But unless growth and inflation improve meaningfully, structural pressure on the yen remains.
Alternative Scenario – Stronger Yen
If wage growth accelerates, inflation stays firm, and the BoJ tightens more than expected, the yen could strengthen sharply.
In that case, USD/JPY could move into the 130–140 zone — or even lower. Low probability, but high impact.
Nikkei 225 – Short-Term Outlook
The Nikkei has had a strong rise:
- Up roughly 45% in one year
- Up nearly 90% in five years
Much of the election optimism and pro-business policy is already priced in. That makes further short-term gains harder and increases the risk of pullbacks.
Key short-term risks:
- Rising bond yields – higher yields can pressure valuations
- US tech weakness – Japan often follows global risk sentiment
- Yen strength – a stronger yen can hurt exporters
- BoJ surprises – faster tightening can hit equities quickly
Expect more range trading and sharp corrections on negative headlines.
Potential approach:
- Buy dips only after price stabilizes
- Selling opportunities into strong rallies
Nikkei 225 – Long-Term Outlook
The longer-term backdrop remains constructive.
Supportive factors include:
- Ongoing corporate governance reform
- Rising share buybacks
- Large corporate cash reserves
- Domestic savings are gradually shifting into equities, creating a steady demand base.
It won’t rise in a straight line. Pullbacks will happen, especially if bond yields rise quickly or the BoJ tightens faster than expected. But unless there is a major fiscal or policy shock, the longer-term trend remains positive.
Alternative Long-Term Risk
Japan’s aging population could slow growth over time, making it harder for companies to expand profits. If the yen strengthens significantly, exporters would face additional pressure as overseas earnings shrink when converted back into yen. In that case, earnings growth could stall and the Nikkei may fall significantly over the longer term.
Key Points to Watch for Traders
BoJ Communication
Pay close attention to how the BoJ talks about inflation and wage growth. A more hawkish tone could strengthen the yen and pressure stocks. A cautious tone would likely support continued yen weakness.
Fiscal Announcements
The details of tax cuts and spending plans matter. Markets will focus on whether stimulus is temporary and whether there is a clear plan to manage long-term debt.
Bond Yields
The 10-year JGB yield is a key signal. If yields rise too quickly, stocks can come under pressure, debt fears may increase, and yen volatility can spike.
Intervention Signals
Officials often give verbal warnings before acting in the currency market. Price behavior near 160 in USD/JPY is especially important. Sudden moves lower can create sharp but short-lived trading opportunities.
Global Risk and AI Sentiment
The Nikkei is closely linked to US tech performance. If US AI stocks fall sharply, Japanese equities may follow, creating both downside risk and potential dip-buying setups.
Opportunities Ahead in Japanese Markets
Takaichi’s supermajority brings clear policy direction and stronger political control. Japanese markets will react quickly to fiscal decisions, bond yields, and central bank signals, keeping USD/JPY and the Nikkei 225 active.
For traders, that means opportunity. Volatility and policy-driven moves create regular setups — especially for those who stay flexible and manage risk carefully.
