How Japan’s Recent Election Affected its Financial Markets

Background on Election Campaign 

In February 2026, Japan’s Prime Minister Sanae Takaichi was re-elected for a second term, with her campaign concentrating on cutting the country’s 8% food consumption tax and increasing defence spending (Kyung-Hoon, 2026). The conservative leader’s focus on expansionary fiscal spending aims to diffuse Japan’s disinflation and deflationary cycle which originated in the early 1990’s (Tan, 2025). This radical shift in fiscal and economic policy worries financial markets as Japan has the highest debt burden among advanced countries with a debt-to GDP ratio above 230% (Power, 2026), and investors are concerned about the source of government funds for the stimulus (Geddie. J, Kelly. T, 2026).  

The Takaichi Government hopes that cutting the consumption tax will ease household budgets (Kyung-Hoon, 2026) by distributing 5 trillion yen (Kihara. L. Yamazaki. M, 2026) into the economy. This extreme fiscal stimulus can be attributed to the rise in Japanese food inflation of 5.1% in December 2025 (Trading Economics, 2026), highlighting strains on family finances. Furthermore, the fiscal stimulus pledges to strengthen the country’s military spending to reinforce an alliance with US trade as well as increase the value of equities in critical resources and defence industries (Kirk, 2026) 

Effect on Markets 

Following these campaign announcements, Japanese markets, who value “responsible, proactive fiscal policy” (Kihara, 2026) began selling local bonds and currency, causing the yen to slide close to the critical 160 yen to the dollar line (CNBC, 2026). This depreciation of –1.27% (Trading Economics, 2026) in the Japanese yen is expected to erode household purchasing power and counteracts the government’s promises to alleviate household budgets (CNBC, 2026). 

Investors are concerned that Takaichi’s expansionary fiscal policy could lead to additional debt issuance and spiraling inflation (CNBC, 2026). The Bank of Japan (BOJ) may also enact some reconfiguration of their balance sheet (Reuters, 2026), including accelerating monetary tightening. This is expected to collapse the central bank’s cautious and planned approach to interest rate hikes, which is currently at 0.75% (CNBC, 2026). 

Additionally, the consumption tax cut promise has triggered an increase in 10-year bond yields by 17 basis points in January (Tradeweb, 2026), as investors expect an increased supply of Japanese bonds and an increasingly inflationary environment (CNBC, 2026). This rise in bond yields, will make it challenging for the Japanese government to pay down its debts (CNBC, 2026), especially if this shift in fiscal spending continues.  

Globally, Japanese currency has historically been attractive and safe to investors, as they could purchase the yen at low rates and use it to purchase securities in other currencies (McGeever, 2026), in a mechanism known as ‘carry trades’ (Gratton, 2025). However, since the economy now has extremely high debt burdens, investors no longer consider the currency as a “safe haven”, (Yamazaki. M, Yamaguchi .T, 2026) This makes the Japanese economy more vulnerable to other economic shocks such as supply chain difficulties and the conflict in the Middle East.  

Figure 1. Changes in Japanese currency since October 2025. As the line moves up (to 160), it takes more yen to buy US$1, and so the currency is weakening Source: Trading Economics (2026). 

After the Election – Middle East Conflict and Future Possibilities.  

The conflict in the Middle East has further fuelled issues for the Japanese yen as the currency was pushed again, close to 160-per-dollar line (Yamazaki. M, Yamaguchi. T, 2026). This has been triggered by rising safe-haven demand for US dollars (Yamazaki. M, Yamaguchi. T, 2026) amidst reservations that surging oil costs could damage Japan’s import & energy reliant economy (Letts, 2026). The falling yen contributes to an increase in import costs as well as broader inflation (Sier, 2026), which exacerbates the need for fiscal and monetary stimulus to manage price rises. Ultimately, the global consequences of this conflict may be an additional factor in requiring the BOJ to raise interest rates so that it can align itself with US rates to minimise currency depreciation (Yamazaki. M, Yamaguchi. T, 2026). 

Domestically, there are also concerns that once the consumption tax cuts are implemented, that the market will react negatively (Reuters, 2026) as investors do not believe that the government can service the tax cuts through debt. Meanwhile, the economic plan may also add value to domestic stocks as shareholders capitalise on the rise in defence spending (Reuters, 2026). This combination of rising equity and falling currency markets is likely to lead to further cost inflation (Reuters, 2026), which may also be a contributing factor for the BOJ to increase the yen, through quantitative easing measures.  

Conclusion  

Overall, the recent election campaign in Japan has materialized the sensitivities of its economy and financial markets, which will require careful and collaborative analysis by policy-makers and institutions. This is particularly important because the Bank of Japan is limited in servicing the government’s consumption tax cuts and other stimulus as it has been avoiding purchases of bonds and currency (Power, 2026). This lack of monetary flexibility is what makes investors concerned about the future of Japan’s markets.  

References 

Reuters. 2026. Instant View: Japan's markets react to Takaichi's historic election victory. Reuters. https://www.reuters.com/world/asia-pacific/view-japan-markets-brace-historic-electoral-win-by-pm-takaichi-2026-02-08/ 

CNBC. 2026. Japan PM vows to act against speculative market moves after yen spike. CNBC. https://www.cnbc.com/2026/01/25/japan-pm-vows-to-act-against-speculative-market-moves-after-yen-spike.html 

Oxford Economics. 2026. Takaichi’s big win doesn’t affect the fiscal outlook for Japan. Oxford Economics. https://www.oxfordeconomics.com/resource/takaichis-big-win-doesnt-affect-the-fiscal-outlook-for-japan/ 

Oxford Economics. 2026. BoJ will need to do more because of fiscal expansion. Oxford Economics. https://www.oxfordeconomics.com/resource/boj-will-need-to-do-more-because-of-fiscal expansion/#:~:text=We%20see%20the%20Bank%20of,t%20falling%20behind%20the%20curve 

Power, J. 2026. Why Japan’s economic plans are sending jitters through global markets. Al Jazeera. https://www.aljazeera.com/economy/2026/1/27/why-japans-economic-plans-are-sending-jitters-through-global-markets#:~:text=%E2%80%9CWhen%20Prime%20Minister%20Takaichi%20announced,interventions%20to%20bring%20yields%20down. 

Aiken, K. 2026. Markets prepare for "chaos and turmoil" as Japan sees dramatic bond yield movements. Australian Broadcasting Corporation. https://www.abc.net.au/news/programs/the-business/2025-12-01/markets-prepare-for-chaos-and-turmoil-as-japan-sees-dramatic-bon/106088406 

Yang, S. Taylor, D. 2026. February's stock market gains wiped out as war shows no signs of easing — as it happened. Australian Broadcasting Corporation. https://www.abc.net.au/news/2026-03-06/asx-markets-business-news-march06-2026/106422840 

Letts, S. 2026. ASX sheds $90 billion as oil's 25pc surge crushes Asian markets, banks and miners hard hit, global interest rates rise on inflation fears — as it happened. Australian Broadcasting Corporation. https://www.abc.net.au/news/2026-03-09/asx-markets-business-news-live-updates-march-9/106429652 

Kyung-Hoon, K. 2026. Japan PM Sanae Takaichi leads coalition to landslide election victory. Australian Broadcasting Corporation. https://www.abc.net.au/news/2026-02-09/japan-election-sanae-takaichi-landslide-victory/106320228 

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Samonte, J. 2026. Japan Core Inflation Slows to 2-Year Low. Trading Economics. https://tradingeconomics.com/japan/core-inflation-rate/news/527173 

Geddie, J. Kelly, T. 2026. Japan’s “Iron Lady” Takaichi forges historical election win. Reuters. https://www.reuters.com/world/china/japan-votes-test-pm-takaichi-snow-weighs-turnout-2026-02-07/ 

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Gratton, P. 2026. What is Carry Trade? Definition, Example & Risks Explained. Investopedia. https://www.investopedia.com/carry-trade-definition-468265  

Sier, J. 2026. Asia most vulnerable to Middle East energy bottleneck. Australian Financial Review. https://www.afr.com/world/asia/asia-most-vulnerable-to-middle-east-energy-bottleneck-20260309-p5o8t3  

Dua, S. 2026. Japanese Yen declines toward 19-month low against USD amid boiling oil prices. FX Street. https://www.fxstreet.com/news/japanese-yen-declines-toward-19-month-low-against-usd-amid-boiling-oil-prices-202603090639 

McGeever, J. 2025. Japanese yen's safe-haven illusion shatters. Reuters. https://www.reuters.com/markets/currencies/japanese-yens-safe-haven-illusion-shatters-2025-11-19/   

Kihara, L. Yamazaki, M. 2026. Japan may struggle to calm markets tripped up by Takaichi's taboo tax cut. Reuters.  https://www.reuters.com/world/asia-pacific/japan-may-struggle-calm-markets-tripped-up-by-takaichis-taboo-tax-cut-2026-01-21/#:~:text=The%20dangers%20of%20cutting%20the,years%20the%20food%20sales%20levy.