The recent snap election for Japan's House of Representatives, held on February 8th, concluded with a decisive victory for the Liberal Democratic Party (LDP) led by Prime Minister Sana. The LDP secured approximately 316 seats in the 465-seat lower house, achieving not only a simple majority but also, for the first time in the post-war era, a supermajority of over two-thirds of the seats by a single party. Together with its coalition partner, the ruling bloc controls around 350 seats, granting it a strong legislative mandate to advance its policy agenda.
This outcome is widely interpreted by global media as an endorsement from voters for the core economic policies of the Sana administration. Measures such as expanding fiscal spending, providing targeted support to key industries, and considering reductions in consumption tax burdens have resonated with the public's urgent expectations for economic recovery, contributing significantly to the LDP's broad support.
Following the election results, Japanese capital markets responded positively. On the first trading day after the election, the Nikkei 225 index surged by approximately 5.5% intraday, breaking through the historic high of 57,000 points. The Topix index also rose by over 3%, with sectors closely aligned with Sana's policy direction, such as defense, semiconductors, and machinery, performing notably well and leading the gains.
In currency and bond markets, rational adjustments were observed. The yen strengthened slightly within the 156-157 range against the US dollar, while the yield on the 10-year Japanese Government Bond (JGB) rose by about 5 basis points to around 2.28%. Market analysts view these movements as normal reactions, essentially reflecting investors repricing assets in anticipation of larger-scale fiscal spending and potential further interest rate hikes in Japan. Overall volatility remains within controllable limits, with no signs of abnormal fluctuations.
The impact of Japan's election extended beyond its borders, influencing global capital markets. Major stock markets in Asia and Europe generally trended higher, and US stock index futures saw modest gains during European trading hours, indicating a clear improvement in market risk appetite. Several international institutions noted that this global market uplift is not driven by a single event but results from the combined effect of two factors: the complete removal of uncertainty surrounding the Japanese election and a阶段性反弹 in global technology stocks. The policy certainty brought by the election's conclusion has been a key driver in improving short-term market sentiment.
A key point of contention lies in who will主导 the future path of interest rates. The uniqueness of this election is its timing, occurring after the Bank of Japan (BOJ) initiated its first interest rate hike and began gradually exiting its Yield Curve Control (YCC) policy. This context adds practical significance to the policy博弈 following the election result, directly highlighting the core分歧 in Japan's current economic policy.
By the end of 2025, Japanese inflation had remained above the 2% policy target for nearly four consecutive years, with inflationary stickiness gradually increasing. In this environment, the BOJ had raised its policy rate to 0.75%, a multi-decade high, leading to a significant rise in long-term government bond yields. These adjustments mark Japan's formal departure from the prolonged era of zero interest rates and its entry into a phase of monetary policy normalization.
Sana's election victory, centered on a platform of "proactive fiscal policy and targeted industrial investment," signifies that her主导的 "Sananomics" will receive a strengthened mandate. The scale of subsequent fiscal expansion is highly likely to increase further. Concurrently, BOJ Governor Kazuo Ueda faces dual pressures from persistent high inflation and the need for monetary policy normalization. He must both adhere to the 2% inflation target and guide policy back towards normality. The core分歧 between the two sides focuses on the pace of interest rate adjustments versus fiscal推进, a disagreement that has become the central uncertainty in Japan's policy mix, directly influencing how markets price Japanese assets.
It is crucial to recognize that the core博弈 Japan faces is not a simple choice of "whether further rate hikes are needed," but rather the fundamental question of "who will主导 the future interest rate path" against the dual backdrop of inflation not having fully receded and fiscal policy clearly turning expansionary.
Specifically, the constraints on Governor Ueda's policy are clear. In an environment of strong inflationary stickiness and持续偏高 wage negotiation outcomes, the BOJ must retain the option of further rate hikes to maintain stable inflation expectations and prevent失控. This is a core requirement of its policy mandate. Sana's policy priorities, however, are distinctly different. Her primary goal is to consolidate voter support and spur economic recovery through expansionary budgets, tax cuts, and industrial investment, while also hoping to avoid rapidly rising interest rates that could increase financing costs for the government and businesses, thereby weakening fiscal maneuverability. This stark divergence represents a key "institutional risk" factor that markets focus on when pricing Japanese assets—the extent to which Japan's monetary policy can remain independent from the fiscal impulses of "Sananomics" and resist excessive political intervention.
The first conflict line revolves around inflation and wages, where pressure on the BOJ to hike rates is increasingly evident. In recent years, Japanese inflation has consistently exceeded the 2% target without showing clear signs of abating. Simultaneously, the annual wage negotiations between companies and unions (known as "Shunto") indicate that nominal wage growth is accelerating. A growing number of international institutions believe Japan has partially shaken off its long-standing deflationary mindset, with the linkage between inflation and wages becoming more apparent.
Market attention is高度集中 on the Spring 2026 wage negotiations, specifically observing whether wage increases can again reach the "high range" of around 5%. If this target is met, the justification for Governor Ueda to implement "further rate hikes to stabilize inflation expectations" would be significantly strengthened. Even facing political pressure from the cabinet, maintaining a static stance would become increasingly difficult. In such a scenario, if the Sana administration persists with a markedly expansionary fiscal路线, the BOJ would face a dilemma: either hike rates to curb inflation or tolerate higher inflation, substantially increasing the difficulty of policy choices.
The second conflict line focuses on fiscal scale and government bond issuance, centered on the question: "Who will pay for Sana's fiscal expansion?" During her campaign and after her victory, Sana explicitly stated plans to introduce record-sized government budgets, increase spending on targeted industry support and national security, and moderately reduce certain tax burdens to stimulate economic recovery. Following the announcement of these policies, markets widely anticipate a significant increase in Japanese Government Bond (JGB) supply pressure in the coming years, creating a stark矛盾 against the backdrop of rising interest rates.
In an environment where rates are already gradually increasing, additional JGB issuance would further push up long-term yields, raising government financing costs. If the Sana administration emphasizes at the political level that "interest rates cannot rise too quickly," potentially intervening in market trends, while the BOJ needs to uphold its inflation target and policy independence without conceding to fiscal demands, then the "pace of JGB purchases, reinvestment strategies for maturing bonds, and adjustments to interest rate guidance" will become the most sensitive points of博弈. Market concern is clear: any signal that the "BOJ is yielding to fiscal policy" could trigger a comprehensive reassessment of Japan's risk premium and credit pricing, thereby impacting the entire capital market's pricing logic.
The third conflict line concerns the exchange rate and policy independence, where the yen could act as the "final constraint" on the博弈 between the two sides.
In recent years, the yen has played a prominent role in global carry trades. As a low-interest-rate currency, it has been a core funding currency for investors engaging in these trades. The USD/JPY exchange rate has多次 approached levels considered critical by the market, drawing significant attention from Japanese authorities and sparking widespread discussion about potential intervention. In the current格局, the Sana administration prioritizes economic growth and fiscal space, exhibiting relatively higher tolerance for exchange rate fluctuations. The BOJ, however, must balance price stability with exchange rate stability, avoiding excessive volatility that could impact inflation and policy credibility.
This difference in objectives implies that if fiscal expansion and the interest rate path are perceived by the market as mismatched, the yen could face sustained depreciation pressure. Should the exchange rate approach levels deemed by Japanese officials as indicative of "excessive volatility," the central bank might be forced to take more aggressive tightening measures—potentially at an inopportune time and with limited government cooperation—to defend currency stability and its own policy credibility. Consequently, the yen's exchange rate is likely to serve as a real-time indicator for markets to judge whether the "Sana-Ueda conflict has reached a critical point," and it represents a key channel through which domestic Japanese policy分歧 spills over into global liquidity markets.
Japan's domestic policy博弈 is not irrelevant "background noise" for US stocks but has significant implications for the US market. This influence is not one-dimensional but is transmitted primarily through three clear channels, directly affecting US stock trends and valuation logic.
The first channel is the JGB-US yield linkage, which could elevate global risk-free rates. As BOJ policy normalizes, JGBs offer substantial yields, enhancing their attractiveness. If fiscal expansion and policy uncertainty drive long-term JGB yields higher, Japanese domestic institutions may倾向 towards increasing allocations to domestic bonds, reducing demand for overseas bonds like US Treasuries. This would affect the supply-demand balance for US bonds. Historical data suggests that for every 10-basis-point increase in the 10-year JGB yield, the corresponding US Treasury yield rises by 3-5 basis points. With the US Federal Reserve maintaining high rates and expectations for cuts remaining weak, this transmission could prevent a decline in long-term US yields, even causing them to rise passively, exerting substantive pressure on US growth stocks trading at valuations of 25-30 times earnings or higher.
The second channel involves yen volatility triggering global position unwinding. The yen has long been a core global funding currency. Investors borrowing yen to engage in carry trades have built substantial leveraged positions. If the policy矛盾 between Sana and Ueda escalates, raising market concerns about Japanese policy and the yen's stability, either a yen depreciation or aggressive BOJ tightening could trigger investors to unwind yen-related leveraged trades. This unwinding would spread to the US stock market by contracting global risk exposure, leading to increased market volatility (as measured by the VIX index) and wider liquidity premiums. Highly leveraged, high-valuation growth sectors in the US market could experience short-term剧烈波动 disconnected from fundamentals.
The third channel involves global asset allocation adjustments impacting the core status of US equities. Following the Nikkei's ascent to record highs, markets are重新评估 its investment value, and the allocation balance of global long-term capital is shifting. If the policy矛盾 remains可控, Japanese stocks, supported by policy and improving fundamentals, could emerge as a core equity asset class alongside US stocks. This would dilute the attractiveness of US equities, potentially leading to capital flows from the US to Japan. If the矛盾 intensifies further,剧烈波动 in JGBs and the yen would, through interest rate and risk appetite channels, exert downward pressure on the overall trend of US stocks.