Japan’s first female prime minister, Sanae Takaichi, roared to victory last week in the biggest landslide election win in postwar history, with voters encouraged by her pledges to revitalise the tired economy.
Takaichi’s Liberal Democratic Party (LDP) won 316 seats, more than two-thirds of seats in parliament’s lower house, granting the prime minister a ‘super-majority’.
This ultimately enables LDP to push through bills even if they are rejected by the upper house, where the party lacks a majority, thus granting Takaichi free rein to pass her election pledges.
Takaichi won the snap election, which she called just three months after taking over as Japan’s prime minister, after campaigning on the promise of “a responsible active fiscal policy”, and spending pledges, but has not yet explained how she will fill the gap.
Regardless, investors were invigorated by her victory, sending Japanese stocks through a succession of record highs on the Monday following the election, with the Nikkei 225 rallying by more than five per cent and briefly surpassing the 57,000 mark for the first time.
But, questions surrounding Takaichi’s fiscal plans and her relationship with the bond and yen markets are beginning to rise, leaving industry figures wondering if the prime minister can continue to capitalise on the stock market’s success.
Stock market rallying
The Japanese equity market has undergone a significant rally since March 2025, outperforming global indices.
The market has risen 44.4 per cent over the past year, reaching 56,566.49 yen, with analysts pinning growth to sweeping corporate reforms that were enacted in 2024, similar to South Korea, who implemented reforms to attract overseas investors and drive returns.
Preksha Shah, investment specialist at St James’s Place, said: “Japan has been undergoing corporate reforms since 2024 after decades of sluggish growth, with companies encouraged to focus more on profitability.
“Recent developments also include Tokyo Stock Exchange’s request for companies to manage costs effectively, indicating a shift towards greater shareholder value.”
Positive reactions and diversification
However, Shah noted that the index’s momentum accelerated around the time of the election, “driven largely by the market’s positive reaction” to Taikachi’s victory, as investors expect that her proposed fiscal policies will boost the equity market.
Mark Preskett, senior portfolio manager at Morningstar Wealth said: “A lot of it has come from anticipation of this fiscal package put together by Takaichi.
“The fiscal package is quite significant… it’s a proper shot in the arm for certain sectors.”
Japan has also seen an influx of investors who are shrinking their US allocations, diversifying to tech stocks which are detached to the over-concentrated US markets, as fears over the end of the AI bubble heat up.
Prescott said: “Japan is blessed with a strong technology sector. It’s been most evident in 2026 when you’ve seen outsized gains from some stocks in the defence and tech sector.”
Computer memory manufacturer Kioxia Holdings is up a staggering 97 per cent this year to date, trading at 22,370 yen, while semiconductor maker Tokyo Electron is up 14.1 per cent trading at 42,150 yen.
Currency tension
While the stock market responded positively to Takaichi’s victory, the bonds and currency markets are more apprehensive towards the prime minister’s plans.
The relationship between the markets and the prime minister have been strained since she announced a $135bn (£99.7bn) fiscal plan in November.
Upon calling the election, she promised a two-year suspension of the eight per cent consumption tax on food to ease the cost of living burden on households and combat food inflation.
But, the suspension is predicted to cost roughly 5 trillion yen per year in lost revenue. Coupled with potential social security contribution cuts, increases to defence spending and other pro-growth spending policies, Takaichi runs a risk of undermining the currency.
Shah said: “There remains the uncertainty on if she will be able to fund her promises, without triggering a debt or currency crisis.
“Japan government bond (JGB) yields have been on an upward trajectory since most of 2025 and this trend accelerated in mid-January on expectations of fiscal largess by the new government.
“In a typical sell the rumour by the fact manner, however, yields have retreated post-election, aided by a market friendly speech by the new prime minister on her fiscal plans.”
However, this has left the Bank of Japan balancing a delicate act, as it expected to raise interest rates twice in 2026 but doing so gives Takaichi less fiscal headroom to act on her pledges.
Investor sentiment
Analysts noted that the improved corporate reforms coupled with the likelihood of increased fiscal spending from the LDP could maintain investor sentiment, particularly for mid and small-cap companies.
These companies typically hold “cash-rich” balance sheets and return capital to shareholders through dividends and buybacks.
Shah said: “We see a compelling combination of structural improvement and attractive valuations compared with other markets.
“Valuations remain an important foundation of our investment beliefs, and Japan continues to trade at a discount despite its improving fundamentals, providing a favourable long‑term return backdrop.”
