Sanae Takaichi's Liberal Democratic Party (LDP) is projected to secure a decisive victory in Japan's general election, signaling a potential continuation of the stock market rally while increasing downward pressure on the yen and government bonds. According to NHK projections, the LDP has independently won a supermajority of more than two-thirds of the 465 seats in the lower house, with the ruling coalition significantly expanding its overall majority. This outcome substantially exceeds the expectations of many investors in recent weeks.

KCM Trade Chief Market Analyst Tim Waterer noted, "The clear election result provides a more defined path for Sanae Takaichi's economic stimulus policies, which is undoubtedly positive news for the Nikkei index. However, with the LDP's fiscal stimulus plans effectively receiving approval, the yen could face intensified depreciation pressure." In early Asian trading on Monday, the yen traded within a relatively narrow range. At the time of writing, the USD/JPY pair was slightly lower at 157.61. The yen declined 1.6% last week and remains near the 160 level—a threshold that previously prompted Japanese authorities to intervene in the market to support the currency.

Bolstered by expectations of expanded fiscal spending and economic growth under Takaichi, Japan's Topix index closed at a record high on Friday, with year-to-date gains exceeding 8%. In contrast, a global index of developed-market stocks has risen only about 2% over the same period.

Eastspring Investments Fixed Income Portfolio Manager Rong Ren Goh stated, "The scale of the LDP's victory is significant, though not entirely unexpected for the market. Japanese government bond (JGB) yields and the yen had been consolidating in the weeks leading up to the election. Now that the results are clear, markets may revert to their previous trends."

Many investors believe Monday's market focus will revolve around the so-called "Takaichi Trade." A contrarian view also exists, suggesting that the larger Takaichi's victory margin, the less pressure she may feel to implement aggressive economic stimulus measures. Within the equity market, sectors such as defense and nuclear energy are drawing particular attention due to their alignment with Takaichi's proposed national investment agenda.

Gerald Gan, Chief Investment Officer at Singapore-based Reed Capital Partners, commented, "Japanese stocks are poised for a fresh wave of gains following this electoral win. Sectors like defense, artificial intelligence, and semiconductors, which are set to receive increased investment under Takaichi's plans, are likely to be the biggest beneficiaries."

The weakening yen presents a dual impact on Japan's economy: it boosts profits for export-oriented companies but significantly squeezes household budgets. The yen has been on a sustained downtrend since Takaichi became LDP leader last September, with the decline only pausing briefly late last month on signals that US and Japanese authorities might collaborate to stabilize the currency. However, mixed signals from both sides in recent weeks have dampened those stabilization expectations.

Neil Jones, Managing Director of Sales and Trading at TJM Europe, said in an emailed comment, "The natural trajectory for the yen appears to be further depreciation. After the USD/JPY fell below 159 last month, hitting a new low, the global FX market seems to be anticipating that Japanese officials may implement substantive intervention measures if the yen weakens significantly."

During the vote count, Takaichi clarified her previous remarks regarding the "benefits of a weak yen," stating they had been taken out of context. She reiterated that her policy goal is to build an economic structure resilient to exchange rate fluctuations.

Japanese Government Bonds (JGBs), which suffered a sharp sell-off in January that rattled global markets, now face renewed selling pressure. Global asset managers, including Schroders and J.P. Morgan Asset Management, had adopted an underweight stance on JGBs ahead of the election, particularly on ultra-long-term bonds. Core factors driving the bond sell-off include weak market liquidity, Takaichi's proposed temporary cuts to food consumption taxes, and resurgent concerns about Japan's fiscal sustainability.

Despite these concerns, JGBs showed some recovery last week, with upward pressure on yields easing, especially for ultra-long-term bonds. Masanari Takada, Quantitative and Derivatives Strategist at J.P. Morgan Securities Japan, noted, "While the election outcome has made JGB market participants somewhat nervous, the LDP's overwhelming victory could provide Prime Minister Takaichi with greater political flexibility, potentially allowing her administration to be more attentive to the bond market's concerns."

However, overnight index swaps and short-term bond yields have begun to adjust, reflecting growing market expectations that the Bank of Japan (BOJ) might raise interest rates at its April policy meeting. Current market pricing suggests approximately a 75% probability of a 25-basis-point rate hike in April, while a similar hike in June is fully priced in.