Sanae’s Snap: Elections Incoming in Japan

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess developments for their economic and market implications only.

One of the hottest developed-world stock markets to kick off the year got even hotter Wednesday, with Japanese stocks rallying after Prime Minister Sanae Takaichi confirmed she will dissolve the lower house and call snap elections. Headlines say this potentially rekindles the “Takaichi Trade,” where Japanese stocks supposedly rally on fiscal stimulus hopes. To us, things look more complicated. Gridlock looks like the likely winner, which may disappoint in the short term but probably adds tailwinds as 2026 rolls on.

All snap elections are political gambles. But Takaichi’s call looks especially so. Currently, the LDP’s coalition with the Japan Innovation Party (aka Ishin) has a tiny working majority in the Diet’s lower house, relying on three Independent lawmakers to pass legislation. In the upper house, it has a minority government, requiring more horse trading with opposition parties. By calling a snap election, Takaichi hopes to win an outright lower-house majority, capitalizing on her cabinet’s high popularity and her own strong poll numbers. Pollsters are eyeing February 8 or thereabouts for election day, which may be too short a scramble for the many opposition parties to organize campaigns.

Seems logical, but there is a bit of a pickle: The LDP’s popularity is still in the doldrums, damaged by a fundraising scandal. Its polling is a bit higher than when it lost its majority in 2024’s vote, but not much. Voters’ top candidate is “Undecided.” Complicating matters further, Ishin looks set to contest the election on its own rather than work with the LDP to field candidates strategically. Or as co-leader Himofuri Yoshimura put it: “I think we can just fight it out in the election.”^[i]

So we see plenty of uncertainty hanging over the results. No doubt, Takaichi is popular. Between jamming on the drums to some K-pop songs with South Korean President Lee Jae Myung to talking tough on defending Taiwan and making pearls great again, she has charmed the country. Visitors to her hometown, Nara, will find packaged candy honoring her and a long line of revelers waiting to see her old car at the local museum. Her handbag has an eight-month waiting list.^[ii]

But in parliamentary democracies like Japan, voters don’t check a box next to the party leader’s name (unless they are in her constituency). They tick the box for their local candidate, putting party front and center. If any of the opposition parties can mount a campaign that pokes at deep-seated frustrations, they could win enough seats to prevent the LDP from winning that majority. There may not be enough comity among the fragmented opposition parties to form a broad coalition without the LDP, but a renewed LDP-led minority government isn’t out of the question.

Even if the LDP does eke out a majority on its own or with Ishin, don’t pencil in sweeping stimulus, reforms or other changes—Takaichi would still lack an upper house majority, extending gridlock regardless of the outcome. Compromise will still be necessary to push through bills, as we saw with December’s supplemental budget (a small package of tax incentives and other measures aimed at boosting investment).

Overall, we think all the Takaichi Trade talk is too far out over its skis. If broad enthusiasm keeps boosting Japanese returns, as it did Wednesday, a victory for gridlock could prompt some near-term disappointment. What sentiment gives, sentiment can take away, which is a big reason we advise against trying to time any of these short-term moves, up or down. But longer-term, gridlock should be a tailwind. People hate it, but when politicians can’t pass much, investors and businesses don’t have to worry about sweeping changes creating winners and losers. Having confidence the rules won’t change much gives people the latitude to take risk, a powerful and unheralded market tailwind.

Ours is an uncommon view, given the widespread belief Japan needs big stimulus to kick its economy back in gear. But the fundamentals don’t bear that out. Yes, Q3 GDP contracted, but that was due primarily to a change in the building permitting code, which temporarily quashed residential investment. With that in the rearview and dislocations from US tariffs evening out, resilient consumer spending and business investment should become more apparent.

Plus, Japan has a long history of fiscal stimulus packages failing to deliver lasting growth. Public spending and investment merely papered over the cracks caused by the economy’s structural deficiencies. Past governments (most notably under Junichiro Koizumi and the late Shinzo Abe) addressed many of those, making Japan’s economy more competitive. Not perfectly so, but everything is relative, and they successfully picked most of the low-hanging fruit. This probably does more to boost growth long-term than fiscal stimulus would. Past reforms enable more investment … stimulus mostly just redirects investment.

The snap election does come with one other quirky benefit: It is happening early. Markets don’t have to deal with a prolonged will she or won’t she. The election itself offers some clarity. The results will offer more. And from there, the rest of the political calendar outside the US should be pretty calm, with no huge or truly free elections to heighten uncertainty and rattle nerves (barring another French government collapse as budget bickering continues, which isn’t out of the question). That should counterbalance heightened rhetoric in the US as midterm campaigning heats up, giving investors some relief.