Japan's Takaichi Secures Landslide Victory, Markets Eye Fiscal and Crypto Reforms

Prime Minister Sanae Takaichi secured a decisive victory in Sunday's lower house election, giving her a two-thirds majority in Japan's parliament. This landslide win strengthens her mandate to implement economic reforms and provides her with the political leverage to pursue policies without needing coalition support. Exit polls showed her Liberal Democratic Party (LDP) leading strongly, with projections indicating a supermajority according to exit polls.

The result marks a reversal for the LDP, which had seen its influence wane in recent years. Takaichi, Japan's first female prime minister, has maintained a strong personal approval rating of 67%, which bolstered the party's campaign. Her leadership style, coupled with a weakened opposition, contributed to the LDP's dominance.

Investors and analysts are now focused on how Takaichi will balance aggressive fiscal spending with Japan's massive debt load. National debt now exceeds 250% of GDP, and recent spikes in government bond yields have raised concerns about fiscal sustainability.

Why the Move Happened

Takaichi's election victory has been attributed to her folksy appeal and clear communication style. She positioned the election as a referendum on her leadership, drawing large crowds to her rallies. Her campaign focused on economic revitalization and national security, including increased defense spending and improved ties with the U.S.

The LDP had lost support in previous elections, partly due to uninspiring leadership. Takaichi's decisive win contrasts with the performance of the Centrist Reform Alliance, which collapsed in the polls, securing only around 50 seats.

How Markets Responded

Financial markets reacted swiftly to the election outcome. The Nikkei 225 Index set a new all-time high on Monday as investors anticipated a surge in government stimulus and targeted investments in sectors like defense and technology according to Reuters.

The yen, however, remained under pressure against the dollar and euro, continuing a downward trend that began after Takaichi's election as prime minister in October according to FXStreet. Analysts suggest the yen's decline reflects concerns over Japan's debt and expectations of continued fiscal expansion as reported by FXStreet.

Japanese government bond (JGB) yields also rose in the wake of the election, with 30-year yields hitting record highs in late January according to Reuters. Investors are watching how Takaichi will manage this pressure, particularly as she moves forward with a two-year suspension of the 8% consumption tax on food as discussed in crypto analysis.

What Analysts Are Watching

Takaichi's fiscal policies are modeled after those of former prime minister Shinzo Abe's "Abenomics," which focused on aggressive stimulus through bond issuance. This approach has led to concerns over Japan's debt sustainability, with many analysts questioning how long markets will tolerate large-scale borrowing according to WSJ analysis.

One key area of focus is the potential for reforms in the crypto sector. Japan's current tax framework imposes a 55% tax rate on crypto gains, driving investors abroad. Reforms being discussed for fiscal year 2026 include reducing gains tax to 20% and allowing loss carryforwards for three years according to crypto reports.

While Takaichi has not made crypto a central issue, her broader pro-growth stance could create a more favorable environment for digital assets. The Financial Services Agency is also moving forward with regulatory proposals that could provide clearer frameworks for crypto activities as reported by crypto analysts.

Investors are also keeping a close eye on key cabinet appointments. Finance Minister Katsunobu Kato is expected to maintain policy continuity, though his limited engagement with crypto issues may limit the scope of reforms according to crypto analysis. Digital Minister Masaki Taira has yet to articulate a clear stance on crypto, adding to the uncertainty according to crypto reports.

The outcome of Takaichi's leadership will likely shape the direction of Japan's economy and its role in global markets. Her ability to balance fiscal stimulus with sustainability will be a key factor in determining whether the so-called "Takaichi trade" continues to drive market momentum according to Reuters.