Japanese stocks surged to a new record high on Monday after the Liberal Democratic Party (LDP), led by Prime Minister Takaichi Sanae, achieved a historic single-party victory in the Lower House election. The performance of the yen and Japanese Government Bonds (JGBs) was notably calmer than many had feared, despite previous volatility driven by concerns over the government's fiscal sustainability. The market's reaction to the election outcome indicates that investors are willing to grant Prime Minister Takaichi and the LDP a "trust dividend," betting that their super-majority will bring policy clarity and reduce the risk of worst-case fiscal scenarios.

In the February 8th election, the ruling coalition composed of the LDP and Nippon Ishin no Kai secured a majority of seats. Data shows the LDP won 316 seats, while Nippon Ishin no Kai gained 36. This gives the LDP a two-thirds majority in the 465-seat Lower House. With this "super-majority," the ruling coalition led by Prime Minister Takaichi will find it easier to pass legislation.

Frederic Neumann, Chief Asia Economist at HSBC Holdings, stated, "The LDP's decisive election victory will provide strong momentum for the stock market." He noted that Prime Minister Takaichi has received a stronger mandate, which will aid in implementing structural reforms that could boost productivity and corporate profits. "More importantly," he added, "a large ruling majority should also ensure fiscal spending remains relatively restrained, thereby reducing the risk of volatility in the bond market."

This view is gaining traction among investors. Many believe the election result reduces political noise rather than immediately triggering a wave of fiscal spending. Although yields on long-term JGBs initially rose on Monday, they quickly retreated, alleviating fears of a repeat of the disorderly sell-off that rattled the Japanese bond market earlier this year. The yen also strengthened by 0.6%, reaching 156.22 per US dollar, moving further away from the 160-yen level that previously prompted intervention by Japanese authorities.

Statements from policymakers have also helped stabilize market sentiment. Japanese Finance Minister Katayama Satsuki emphasized that a proposed consumption tax cut would be limited to two years, apply only to food, and would not be financed by new bond issuance. Meanwhile, Prime Minister Takaichi has stressed her commitment to responsible yet proactive fiscal policy.

Sree Kochugovindan, Senior Research Economist at Aberdeen Investments, commented, "The LDP's overwhelming victory does not mean Prime Minister Takaichi has a free hand to spend lavishly. The LDP is relatively fiscally conservative, and Takaichi has been very mindful of bond investors' sentiments."

Kazuhiro Sasaki, Research Head at Phillip Securities Japan Ltd., noted that the opposition parties gained almost no ground in the election, meaning "a permanent consumption tax cut is almost certainly off the agenda, which is a significant positive for the bond market and also helps support the yen."

Bullish investors have taken note of this shift. Following the election, a team of strategists at JPMorgan Chase & Co. raised their year-end target for the Nikkei 225 index to 61,000, citing expectations of enhanced political stability. Furthermore, analysts suggest sectors likely to benefit from Prime Minister Takaichi's spending plans, such as defense and semiconductors, could see further gains.

Amir Anvarzadeh, Japanese Equity Strategist at Asymmetric Advisors, said, "From an equity market perspective, the LDP's landslide victory is extremely ideal, as it removes a great deal of the political uncertainty that has plagued the ruling party since the assassination of Shinzo Abe."

However, traders are acutely aware that Japan's room for maneuver on both fiscal and monetary policy has narrowed. Bond and currency markets could react swiftly if spending plans appear to lack clear funding sources or if inflationary pressures intensify.

Looking ahead, markets will focus on whether election momentum can quickly translate into concrete policy action. A special parliamentary session could be convened as early as February to begin discussions on the fiscal 2026 budget. As details of the government's fiscal expansion plans become clearer, Kazuhiro Toyoda, Head of Japanese Equities at Schroders Investment Management, cautioned, "Volatility in the bond market could still rise again. I don't think the stock market will embark on a simple, one-way upward path from here."

Market attention will also be focused on US-Japan relations. Prime Minister Takaichi is scheduled to meet with US President Donald Trump at the White House on March 19th. Discussion topics are expected to include defense spending and investment commitments under Japan's pledged $550 billion investment package.

For now, however, the market has found some comfort. David Chao, Global Market Strategist for Asia Pacific at Invesco, stated, "Prime Minister Takaichi's decision to call a snap election clearly paid off. The combination of political stability, policy continuity, and room for reform is likely to be viewed positively by the market, further reinforcing the constructive outlook still held for Japanese risk assets."