【True Insight Hong Kong Stock Market】LDP expected to win multiple seats, heavy selling pressure on yen

As Japan is set to hold a crucial election this weekend, the selling pressure on the yen has intensified, following Japanese Prime Minister Sanae Takaichi's remarks at the end of January about the benefits of a weak currency.

Takaichi announced an early election to consolidate her leadership, with polls indicating her party is likely to secure a single majority. This outcome would give her greater freedom to push for fiscal stimulus policies, further increasing Japan's already heavy debt burden.

According to a poll released by the Asahi Shimbun on Sunday, the Liberal Democratic Party (LDP) may win more than 233 seats in the 465-seat House of Representatives, far exceeding the current 198 seats. The poll also showed that the LDP and its coalition partner, the Innovation Party, could secure as many as 300 seats combined.
After Takaichi successfully secured leadership of the LDP in October last year, the yen steadily depreciated, hitting an 18-month low against the U.S. dollar last month.

Subsequently, on January 23, concerns about joint intervention by Japan and the U.S. in the currency market caused a sharp reversal in the yen's exchange rate. However, as U.S. Treasury Secretary Scott Bessent reiterated support for a strong dollar policy and Kevin Warsh was nominated as the next Federal Reserve Chair, the dollar rebounded across the board from its lows, and yen selling pressure resumed.

Takaichi's latest comments further exacerbated the yen's decline. Over the weekend, she stated that a weaker yen benefits exporters, fueling market pessimism toward the yen.

Currently, the market expects Takaichi's LDP to have a high chance of a landslide victory in the House of Representatives election, increasing the likelihood of Japan continuing large-scale spending and tax cuts. Japanese investors have never been as nervous as they are now, believing market risks are rising and the outlook is turning pessimistic.

If the LDP wins a sweeping victory, it will further consolidate Takaichi's power. She is more likely to implement her aggressive fiscal policies, including reducing the consumption tax.

Compared to previous pre-election periods, the difference this time lies in the heightened volatility of the yen and Japanese government bonds.

If history is any guide, the outlook for Japanese stocks tends to be positive. In elections where the LDP won the most seats—including Junichiro Koizumi's landslide victory in 2005 and Shinzo Abe's formation of his second cabinet in 2012—the Nikkei index performed the strongest, with gains of 44% and 70%, respectively, six months later.

(Written by: Professor Li Huifen, Greater Bay Area Family Office Association) (The author does not hold the above stocks)