The Japanese House of Representatives election on February 8, 2026, concluded with a historically pivotal result, opening a new era for the Land of the Rising Sun under the decisive leadership of its first female Prime Minister, Ms. Sanae Takaichi. This was not merely an ordinary political victory but an event that shook global financial markets, establishing unprecedented precedents for the Yen and the Japanese Government Bond (JGB) market.

A Historic Turning Point

The election results showed that the ruling Liberal Democratic Party (LDP) and its coalition partners won a landslide victory with 352 seats, of which the LDP alone accounted for 316 seats—the highest level since the current electoral system was adopted in 1996.

Ms. Takaichi’s gamble on a snap election in the middle of a harsh winter, despite record snowfall, yielded great results as voters were drawn to the image of a straightforward and fierce leader.

This victory provides Ms. Takaichi with a "super-majority" in the House of Representatives, officially ending the period of political fragmentation and granting her absolute power to implement the agenda known as "Takaichi-nomics."

This result also marked a heavy defeat for the opposition as major names in Japanese politics simultaneously lost their seats, affirming voters' confidence in Ms. Takaichi’s "moving forward together" direction.

Active Fiscalism

With a solid position, the Japanese Government is expected to accelerate the implementation of strong economic commitments, especially a fiscal stimulus package worth more than 21 trillion Yen. The focus of this policy is the two-year suspension of the consumption tax on food (8%) to support the cost of living for the people.

Regarding foreign affairs and defense, Ms. Takaichi’s victory—someone who receives absolute support from Mr. Donald Trump—signals a tougher stance toward China and accelerates military investment to protect Taiwan.

However, absolute power also brings a positive paradox for the market: Ms. Takaichi will no longer be under pressure to race in spending with opposition parties, which had even more extreme tax cut proposals.

This allows her to maintain a certain balance between growth-promoting spending and the fiscal discipline necessary to calm investor sentiment.

The Boom of Stocks and the Bond Shock

Immediately after the results were announced, financial markets reacted violently according to the "Takaichi trade" scenario. The Nikkei 225 index created a seismic shift when it leaped to an all-time record high, surpassing the 55,000-point threshold and touching the 57,000-point mark in the trading session on the morning of February 9.

Investors placed large bets on the defense, AI, and semiconductor sectors, which are the top priorities of the new Government. Conversely, the Government Bond (JGB) market continued to face sell-off pressure, causing yields to rise sharply. Yields on 10-year and especially 30-year bonds soared due to concerns that the massive public debt would swell further to finance the stimulus packages.

The turbulence in the Japanese debt market is not just an internal issue but has spread globally, pushing up borrowing costs from the U.S. to Germany, reminding the world of the risks from the public debt of major economies.

JPY and JGB: The Red Line and Reversal Pressure

The paradox here stems from the Japanese Government Bond market. Concerns about the massive fiscal stimulus package of Prime Minister Takaichi's government pushed JGB yields to record highs. However, when considering the scale of Japan's public debt compared to equivalent economies, this yield level can be said to still be low.

This phenomenon is due to the Bank of Japan (BOJ) continuously buying JGBs, which has suppressed the yields of Japanese bonds. On one hand, this action controls the borrowing costs of the Japanese Government, but on the other hand, it causes the Japanese Yen to weaken against other currencies.

When a government spends too much, pressure is placed on both the government bonds and the currency of that country. However, in the case of Japan, due to the continuous intervention of the BOJ, these pressures are concentrated on the Japanese Yen, causing the USDJPY exchange rate to continuously increase, reaching the 160 threshold.

Japanese Finance Minister Katayama took action to reassure the market by announcing that he would communicate with the market on Monday, after the election results were available, and stated that he would use foreign exchange reserves to finance the government's tax cut policies or spending if necessary.

As such, instead of issuing more bonds to finance spending, the Japanese government may sell off reserve assets. A large part of these assets is U.S. Treasuries. As discussed previously, if this option is pursued, it is highly likely that the BOJ will implement it in cooperation with the Fed to ensure that U.S. Treasury yields are not pushed up. Future Fed Chairman Kevin Warsh may loosen the capital adequacy ratios of the U.S. banking system, allowing these banks to absorb the amount of Treasuries that the BOJ sells, balancing the impact on the market. On the other hand, the Fed will continue to cut interest rates, which will make the USD weaker, meaning it will indirectly help the JPY strengthen.

However, the above scenario contains many variables, such as whether Kevin Warsh will become the Fed Chairman, and if so, whether he will implement such policy expectations. Nevertheless, some analysts believe that the LDP's landslide victory may be the "best-case scenario" to stabilize the Yen in the medium term. When the government no longer has to make excessive spending promises to attract voters, the pressure on the exchange rate may decrease. In the coming time, the market is expected to witness a tug-of-war: the Yen will continue to face downward pressure from the expansionary fiscal policy, but at the same time will be supported by expectations that the Bank of Japan (BoJ) must raise interest rates to curb inflation. For JGBs, yields are forecast to remain at high levels above 3% for long-term maturities. Upcoming bond auctions will be a key test for investor confidence in Ms. Takaichi's debt management capabilities, while pressure from Washington may force Tokyo to take more cautious steps to avoid destabilizing the global financial system.