Japan’s snap elections

Japan concluded a snap general election yesterday for all 465 seats in the House of Representatives, the lower house of its parliament. Prime Minister Sanae Takaichi, who became Japan’s first female prime minister in October 2025, called the election just over 100 days into her term to secure a stronger mandate for her policies.  Takaichi achieved a historic landslide victory, winning 316 seats on its own.  She has pledged for stimulus and tax cuts, estimated to create a 10 trillion yen ($63.85 billion) revenue shortfall without new bond issuance, have raised concerns about increased borrowing and inflation. Post-election, Japanese bond markets saw immediate volatility: the 10-year JGB yield rose 6 basis points to 2.29%, while the 30-year yield initially spiked but settled up just 1 basis point at 3.56%.  Shorter-dated yields climbed more sharply, with the two-year yield hitting 1.31% (highest since 1996) and the five-year at 1.735%, flattening the yield curve.  Analysts attribute this to expectations of faster economic growth from stimulus, potentially prompting the BOJ to hike rates earlier to combat inflation, which could push yields toward 3% by 2027. Equities reacted positively, with stocks surging to record highs on reduced political uncertainty and the “Takaichi trade” narrative of stronger growth and a weaker yen.  The ripple effects on US Treasuries stem from interconnected global bond markets and Japan’s role as one of the largest foreign holders of US government debt (over $1 trillion). Rising JGB yields could prompt Japanese investors, including institutions and the BOJ, to repatriate funds by selling US Treasuries to buy higher-yielding domestic bonds, exerting upward pressure on US yields.

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