Takaichi's Japan Election Gamble Risks Unravelling Without Ally

Japanese Prime Minister Sanae Takaichi is preparing to call a snap election as early as February to strengthen her government's grip on power. Media reports indicate she will inform senior party officials on Wednesday of her plan to dissolve the lower house, with an election expected to follow shortly thereafter.

Takaichi, who became Japan's first female prime minister in October, enjoys a high approval rating of around 70%, but her ruling Liberal Democratic Party (LDP) holds only a slim majority in the 465-seat lower house. This has hampered the government's ability to push through her ambitious policy agenda.

The snap election, if called, would be the first under Takaichi's leadership. The LDP is hoping to increase its seat count and solidify its dominance in the lower house, which would help pass expansionary fiscal policies and support her foreign policy stance.

Why Did This Happen?

Takaichi's decision to call an early election is rooted in both political and economic strategy. Her government recently approved a record budget of 122.3 trillion yen (US$768 billion) for the fiscal year starting in April. This spending plan is designed to address inflation and support the economy. However, the LDP needs more seats to secure quick parliamentary approval of the budget.

The timing of the election also aligns with her desire to solidify her political base before facing challenges from opposition parties. The LDP's former coalition partner, Komeito, split from the party in October, forcing Takaichi to rely on the Japan Innovation Party, a new and less-tested ally.

How Did Markets React?

News of the potential snap election sent mixed signals in financial markets. The yen hit a year low against the dollar, while Japanese government bonds sold off, pushing yields to record levels. Investors are betting that an LDP victory will lead to more aggressive fiscal spending, which could worsen Japan's fiscal position.

The Nikkei 225 and Topix indices both hit record highs as investors reacted to the prospect of continued pro-business policies. However, some analysts warn that the focus on electoral gains may delay critical budget approvals, potentially exacerbating inflation and economic uncertainty.

What Are Analysts Watching Next?

Political analysts are closely monitoring the dynamics of the new LDP-JIP coalition. While the Japan Innovation Party shares the LDP's right-leaning views on national security and economic policies, it lacks the organizational reach of Komeito, which historically helped the LDP win key districts. The lack of a strong coalition partner increases the risk of losing seats in the upcoming election.

Market observers are also watching the Bank of Japan for signs of rate hikes. The weak yen and aggressive fiscal expansion have led to speculation that the BOJ may raise interest rates earlier than expected, possibly as soon as April.

The success of Takaichi's election gamble will determine whether her administration can maintain political stability and pursue its economic and foreign policy goals. A strong LDP showing could reinforce her mandate, but a poor result may force her to reconsider her strategy or even lead to early government instability.

The upcoming election will not only test Takaichi's political acumen but also have far-reaching implications for Japan's economy and its diplomatic posture in the region.