Japanese Prime Minister Sanae Takaichi announced on the 19th that she will dissolve the House of Representatives on the 23rd. The last lower house election was held in October 2024, and the decision by Takaichi to dissolve the chamber after just over a year has drawn significant criticism. Many analysts state that the political instability in Japan is introducing greater uncertainty into the economy, not only triggering turbulence in capital markets—resulting in a simultaneous sell-off in both bonds and the currency—but also potentially causing substantial delays to a series of important legislative procedures, casting uncertainty over the new fiscal year's budget and numerous public welfare areas.
As early as the 10th of this month, Japanese media reported that Prime Minister Takaichi had decided to dissolve the House of Representatives. The ruling Liberal Democratic Party (LDP), which Takaichi leads, currently lacks a single-party majority in the lower house. Markets fear that if the LDP wins the election, it would embolden Takaichi's aggressive fiscal policies, sharply increasing investor anxiety over the deterioration of Japan's fiscal health. This has led to a scenario in Tokyo's capital markets where government bond prices are falling and the yen is depreciating simultaneously.
As investors rushed to sell, long-term Japanese government bond (JGB) yields surged sharply in the Tokyo bond market. On the 14th, the yield on the benchmark newly issued 10-year JGB momentarily climbed to 2.23%, reaching its highest level since February 1999. In the Tokyo foreign exchange market, the yen also weakened dramatically against the US dollar, briefly falling to 159.45 yen. Japanese Finance Minister Satsuki Katayama urgently issued a verbal intervention on the 16th, stating that authorities would "take all possible measures" to curb the yen's decline.
Since Sanae Takaichi was elected president of the LDP on October 4 last year, investor concerns have deepened that aggressive fiscal spending will lead to a worsening fiscal situation. Long-term government bonds of various maturities have been widely sold off by investors, causing long-term bond prices to fall and their yields to rise consecutively, breaking through historical highs. In just over three months, the yield on the new 10-year JGB has increased by more than 0.5 percentage points. The yen has also re-entered a downward trend against the US dollar, continuing to weaken.
Takahide Kiuchi, an economist at Nomura Research Institute, pointed out that a sharp depreciation of the yen would further push up prices, suppressing already sluggish personal consumption. Furthermore, long-term interest rates rising above 2% would significantly increase corporate financing costs, negatively impacting economic recovery.
The chaos stemming from Japan's political instability extends beyond the markets. By convention, the budget for the new fiscal year is deliberated and passed by the end of March. Prime Minister Takaichi's dissolution of the lower house and call for a snap election during the initial stage of the parliamentary session forces a postponement of the Diet's schedule. This will significantly impact the deliberation and passage of the budget bill and a series of tax reform bills. If the new fiscal year's budget fails to gain approval from the newly constituted Diet in a timely manner, the daily lives of Japanese citizens and economic operations will be affected starting April 1, when the 2026 fiscal year begins.
The Takaichi cabinet had previously promised to expand the current tuition subsidy program for public high schools to include private high schools starting in April 2026. To this end, the draft budget for FY2026 allocated 617.4 billion yen for this policy. If the new fiscal year's budget bill is not approved by the Diet as scheduled, it remains unclear whether this policy can be implemented at the start of the new academic year.
Simultaneously, multiple planned tax system reforms, scheduled to take effect from April 1st, await deliberation and approval by the Diet. Currently, Japanese consumers must pay an environmental tax of up to 3% when purchasing a car. To support the automotive industry, which is struggling due to US tariff policies, the government had planned to abolish this tax from April 1st to stimulate new car purchases.
Daisuke Karakama, Chief Market Economist at Mizuho Bank, commented, "Given the current economic and financial situation in Japan, public support for the Takaichi administration will likely ultimately decline due to economic stagnation and inflation."
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