Ahead of the Japanese election on 8 February 2026, Sree Kochugovindan, Senior Research Economist, at Aberdeen Investments outlines three scenarios, with policy and market implications:
“Japanese assets are proving highly sensitive to fiscal headlines and play a key role in broader global financial markets, making the upcoming general election particularly important.
“Our base case is a decisive victory for the ruling coalition. The latest surveys signal a strong win for Takaichi’s administration, with a single party majority potentially in reach.
“A decisive win for Takaichi could be the best outcome for markets over the medium term, as strategic investments and tax reform bolster equities.
“And despite our more dovish Bank of Japan expectations relative to market pricing, we think the yen may gain support from a gradual increase in real rates as inflation is set to slow more than is currently appreciated.
“Finally, while Japanese government bond markets are at the sharp end of global long-end pressures, bond market volatility could gradually subside after the election. Despite expectations of excessive fiscal expansion, market dynamics appear to be acting as a constraint for Takaichi.”
Scenario 1: A decisive victory — an LDP landslide, single party majority/LDP-Ishin majority
While Takaichi has the reputation of favouring very expansionary fiscal policy and would be less constrained following an LDP landslide, her tone since becoming PM and the details of the economic package all signal a conservative approach that is wary of debt dynamics and disorderly rise in bond markets.
Furthermore powerful factions, such as that led by Taro Aso, are fiscally conservative, respecting MoF processes, fiscal rules and restoring the primary balance over time.
The Aso faction backed Takaichi in the LDP leadership contest and has been opposed to any form of consumption tax cut. The policy will most likely be shelved completely, postponed, or implemented in a much smaller scale.
Tensions with China will likely remain in this scenario. The risk of extended periods of export controls and travel restrictions could disrupt the growth outlook.
Scenario 2: A narrow victory — LDP gains seats but falls short of a majority
A narrow victory for the LDP would limit Takaichi’s ability to make budget decisions. Compromises and coordination with opposition parties could lead to periodic fiscal concessions that increase the deficit, and slow or reverse the debt/GDP decline.
A reduction in food tax appears more probable under these circumstances. Introducing this policy temporarily, for two years, could reassure investors somewhat; however, reversing it might prove difficult, particularly if Takaichi continues to head a minority government at that time.
Scenario 3: Regime change: ruling party loses seats
Takaichi has pledged to step down in this scenario, which will trigger immense political uncertainty. The LDP would need to hold a leadership contest.
Coalition talks could lead to a range of outcomes, from status quo of LDP/Ishin to a grand collation expanding to more parties that are less concerned over debt dynamics.
At the time of writing, consensus is for Takaichi to remain in power. So, this outcome would trigger the greatest market turmoil.
