Japan's general election is approaching. How will it affect market trends?

Japan will hold House of Representatives elections on February 8th (Sunday). Previously, Japanese Prime Minister Fumio Kishida dissolved the House of Representatives in late January and announced early elections. Current polls show that the ruling coalition is expected to significantly increase its seats, with the probability of the Liberal Democratic Party (LDP) winning an outright majority in the prediction market at about 95%; strong poll results have also intensified the depreciation pressure on the yen.

Although the LDP is leading significantly, investors remain skeptical. The implied volatility of the Nikkei 225 index has risen sharply ahead of the vote, reaching the highest levels in the past decade compared to previous House and Senate elections and LDP leadership races, even surpassing the tense period when the LDP and Komeito ruling coalition lost its majority in 2024.

Regarding this election, the current market concern is whether the LDP can win a majority of seats alone: while Prime Minister Kishida’s cabinet still maintains high approval ratings, the decision to hold an early election instead of implementing policies like inflation measures has faced criticism; additionally, the Constitutional Democratic Party and Komeito forming a new party may give them an advantage in the election; and historically, winter elections with unstable weather are rare, making voter turnout and election impact difficult to predict (see January 21, “Japan Debt and Yen Double Crisis: Is Kishida the Next Truss?”).

Current market trading continues to revolve around a Kishida victory. This is reflected in the resumption of trading in Kishida-related assets: investors are betting on fiscal expansion, with funds flowing into AI, semiconductor, and defense sectors, leading to gains in Japanese stocks. However, expansionary fiscal policies, such as the lack of revenue sources for consumption tax cuts and the re-emergence of reflation trades, will put significant selling pressure on the yen and Japanese government bonds.

How will this election impact market trends?

Since the beginning of 2026, the Japanese stock market has performed relatively strongly driven by favorable fundamentals and expectations of political stability. The TOPIX earnings forecast revision index has been significantly positive. However, from mid-January to now, due to increased uncertainty about the House election results, the upward trend has slowed amid fluctuations, and stock prices remain high.