Commentary: The Fiscal Risks Behind Takaichi’s Historic Landslide

1. In a historic political development, Japan’s Liberal Democratic Party (LDP) has achieved a two-thirds supermajority in the Lower House for the first time since World War II, winning 352 out of 465 seats (76%) in the February 8 election. This provides Prime Minister Sanae Takaichi with an exceptionally strong mandate, strengthening the ruling coalition and leaving the opposition severely weakened[para. 1].

2. Although global investors initially welcomed the LDP’s overwhelming victory, the article cautions that this political stability may enable risky economic experimentation. The LDP’s new dominance paves the way for ambitious fiscal expansion and “Japan First” populism, which could undermine Japan’s already precarious financial situation[para. 2].

3. The landslide result is credited to Takaichi’s compelling personal appeal since taking office in October 2025. Her assertive leadership style and nationalist policies resonated particularly with the younger electorate (ages 18-29), driving significant youth support for the LDP and breaking the party’s traditional reliance on older voters. However, policies such as increased defense spending, substantial tax cuts, and pressure for dovish monetary policy are raising concerns about fiscal sustainability[para. 3].

4. With a supermajority, Takaichi has the legislative strength to push through policies without needing Upper House consent. This is expected to accelerate fiscal and monetary expansion reminiscent of “Abenomics,” but with even greater emphasis on short-term growth over long-term stability[para. 4].

5. Policy changes include revising the National Security Strategy to accelerate defense spending, aiming to raise defense expenditure to 2% of GDP (two years early) and eventually to 3%. To mitigate inflation’s impact, the government will cut the consumption tax on food from 8% to 0% for two years[para. 5].

6. Though the food tax cut is presented as temporary, political realities make a future reversal unlikely, resulting in an effective permanent fiscal expansion valued at about 0.8% of GDP. Japan’s high debt-to-GDP ratio means such moves could spark a crisis of confidence in Japanese government bonds, as evidenced by a 31 basis-point spike in 30-year JGB yields after tax cut promises[para. 6].

7. The Takaichi government’s policies complicate the Bank of Japan’s path away from ultra-loose monetary policy. Takaichi opposes interest rate hikes and insists that deflation is still a concern, heightening political pressure on the central bank even as fiscal loosening risks fueling inflation[para. 7].

8. This divergence in policy could weaken the yen further compared to the U.S. dollar, particularly as the U.S. Federal Reserve under President Trump follows its own path. While large Japanese exporters benefit from a weaker yen, small and midsized enterprises suffer from higher import costs, deepening income inequality and possibly encouraging further populist measures[para. 8].

9. Diplomatically, the election signals a more assertive Japanese stance, with potential moves toward constitutional revision and an enhanced military posture. While U.S. officials praised the outcome for strengthening the U.S.-Japan alliance, the economic impact is complicated by resource demands and supply chain vulnerabilities. Japan’s reliance on imported critical minerals, amid tightening Chinese exports, makes the nation susceptible to external shocks and potential diplomatic isolation in the region[para. 9].

10. Short-term equity market rallies are anticipated due to increased liquidity, but the article warns of mid-term volatility. A loss of fiscal discipline may undermine inflation expectations and overall market confidence[para. 10].

11. Currency markets are seen as a key release valve; despite joint U.S.-Japan efforts to slow the yen’s decline, persistent fiscal expansion and unrestrained monetary policy could drive the currency to record lows, forcing expensive interventions[para. 11].

12. Ultimately, the LDP’s supermajority leaves Japan with unprecedented political might but increased economic instability. Pursuing populist policies at the cost of fiscal prudence, Takaichi has secured broad support yet put Japan’s financial future at risk—setting the stage for markets to render their verdict[para. 12].