There was a cautious tone from wealth managers after a move was made to dissolve parliament and call new elections.

Japan’s Nikkei-225 Index of equities held its ground after rising earlier this week on news that the Asian country’s first-ever female prime minister, Takaichi Sanae, had decided to dissolve the lower house of parliament in the upcoming Diet session, which begins next Friday. 

The index is up 4.5 per cent so far this year, although it was down a touch yesterday. The yen weakened: The dollar/yen rate rose earlier this week, reaching ¥158.91, a level last observed on 12 July 2024 when Japanese authorities injected money into the economy to support growth. It held around the ¥159 rate in mid-afternoon London trade yesterday. 

The move is a bid by Takaichi to assert her authority amid years of the LDP slumping in the polls and political power. 

Wealth managers responded to the snap election decision with a touch of nerves yesterday. 

"The gamble is a bold one. While Takaichi’s cabinet approval ratings have climbed as high as 75 to 76 per cent – outstripping even some of Shinzo Abe’s peaks – support for the LDP [ruling Liberal Democratic Party] itself remains far weaker, hovering in the mid-30s and lower than before its heavy defeat in 2024,” Daniel Hurley, portfolio specialist at T Rowe Price, said. 

Takaichi has been in office since last October, when she formed a coalition with the Japan Innovation Party. Her administration holds a small majority in the lower house.

The premier has “burnished her image as a decisive agent of change, winning plaudits from younger voters and conservatives alike through high-profile diplomacy,” Hurley wrote.

Japanese equities rose on expectations that a Takaichi victory would restore political direction and clear the way for fiscal stimulus. The yen, on the other hand, is weighed by fears of looser fiscal policy.

“The TOPIX [stock market benchmark] has risen over 30 per cent over the past year and we think that there is little room for further re-rating of the market; expectations of a Takaichi win and subsequent fiscal stimulus and yen depreciation are priced in,” Hurley said. (The Nikkei Index ranks stocks by price and tracks the top 225 companies listed on the Tokyo Stock Exchange. In contrast, TOPIX ranks stocks by free-float adjusted market capitalisation.)

At the Goldman Sachs Investment Strategy Group, the risk of a snap election was mentioned in its 2026 Outlook report, co-authored by Sharmin Mossavar-Rahmani, head of ISG and CIO of Goldman Sachs Wealth Management, and Brett Nelson, head of tactical asset allocation for ISG. (The report was issued prior to the actual election announcement.)

“The key risk for Japan lies in the interaction between its monetary and fiscal policies. We expect the BOJ to deliver two 25-basis-point rate increases, in the second and fourth quarters of 2026, lifting the policy rate to 1.25 per cent. While still below most estimates of Japan’s neutral rate, this higher policy rate could nonetheless raise borrowing costs for an already heavily indebted government,” the authors said. “That debt burden is likely to increase further under Prime Minister Sanae Takaichi, following the announcement of a ¥21 trillion spending package late last year. Taken together, tighter monetary policy and rising public debt could intensify market worries around Japan’s long-term fiscal sustainability.”

“The news that snap elections are to be called in Japan will do little to help the beleaguered Japanese government bond (JGB) market,” Colin Finlayson, investment manager at Aegon Asset Management, said. 

“JGB yields had been rising in response to the prospect of further rate hikes from the Bank of Japan and this was accelerated after Prime Minister Takaichi’s surprise victory last year to become the leader of the ruling LDP party,” Finlayson said. “Her pro-growth stance, and willingness to use fiscal spending to achieve this, has spooked the JGB market and has seen 30-year yields hit their highest level since the late 1990s. This election could increase her grip on power and the chances of her mandate being delivered. 

“JGBs had already looked unattractive, and this news does nothing to change that. Much of the pain has been felt by long-dated bonds, and with little or no natural demand for them, buying them today simply on a valuations basis alone is not enough and further underperformance should be expected,” Finlayson added.