Political drama is dominating investors' minds today as they react to a landmark election in Tokyo and mounting pressure on UK Prime Minister Keir Starmer. The yen has strengthened significantly after Japanese Prime Minister Sanae Takaichi secured a sweeping victory in Sunday's pivotal election, decisively ending a six-day run of losses for the currency.
Stock Market Rockets to New High
The Japanese stock market has rocketed to a fresh all-time high as investors enthusiastically welcome the prospect of more substantial fiscal stimulus. Takaichi's Liberal Democratic Party (LDP) has won an absolute majority in Japan's lower house, and with her coalition partner, the Japan Innovation Party, she now commands a powerful supermajority of two-thirds of seats.
This commanding political position will smooth the way for Takaichi to aggressively push through a massive 21 trillion yen (approximately £99 billion) stimulus package. It also facilitates her pledge to suspend Japan's 8% sales tax on food for a full two years, a move aimed at providing direct relief to consumers.
Market Relief After Campaign Volatility
Those ambitious plans had previously rattled financial markets and caused notable currency volatility during the intense election campaign. However, there is now palpable relief across trading floors that Japan's period of political uncertainty appears to be conclusively over.
Analysts at ING stated that the LDP's landslide victory in Japan is unequivocally positive for risk assets, even though her expansionary policies could raise Japan's already significant borrowing levels even higher. They noted, "Prime Minister Takaichi's decision to leverage her popularity for her party turned out to be highly successful. The landslide victory will reinforce her responsible but expansionary fiscal spending and a more Japan-focused foreign policy. Risk-on sentiment will dominate the market for now."
Nikkei's Historic Surge
Japan's Nikkei share average surged to a historic record high on Monday following the election results, decisively surpassing the 56,000 level for the very first time at the start of trading. The index quickly powered through the 57,000 point psychological mark before closing up a robust 3.9% at 56,363 points.
Stock markets globally typically respond positively to announcements of extra fiscal stimulus. After Sanae Takaichi secured what is being termed Japan's largest postwar election victory, the Nikkei 225 index surged over 5% at Monday's market open. Notably, Japanese equities had already outperformed in the four months since she took command of the LDP, even when accounting for the previously weak yen.
The Day's Financial Agenda
The financial world's attention now turns to key European events. At noon BST, European Central Bank Chief Economist Philip Lane is scheduled to deliver a lecture at Maynooth University. Later, at 4pm BST, ECB President Christine Lagarde will participate in a plenary debate on the state of the EU economy and ECB activities in Strasbourg, France. These events are being closely monitored for any signals on future monetary policy direction in the Eurozone.
