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Posted February 2, 2026 at 11:44 am
From political strategy to market impact, this IBKR episode explores how Japan’s snap election could reshape bonds, FX, and equities. Nicholas Ng unpacks the policy signals driving the “Japan trade” and what investors should be watching next.
The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.
Hi everyone. Welcome to the IBKR Podcast. My name is Elizabeth. Another wonderful week in Japan, and we are back with Nicholas Ng, who is Head of Asia Pacific Wealth Businesses at Daiwa Asset Management. Hi, Nick!
Hi, Elisa. Thank you for having me back.
Great having you. I think let’s get straight into it. So recently, Japan’s Prime Minister Sanchi officially announced that she will dissolve the lower house and call a snap election on the 8th of February. Why is the Liberal Democratic Party taking this approach, with Prime Minister Kochi only three or four months into office?
Thank you very much for the question, Elisa, and it’s incredibly timely. One of the main reasons why the Liberal Democratic Party, or LDP for short, is calling a snap election is that in the previous elections, the LDP did partner with a party called C. And since then, the LDP has partnered with another party known as the Japan Innovation Party.
So it does seem as if the LDP is looking to gauge the public interest or other potential votes from the public to see if they are able to increase their majority. Currently, the LDP has a slim majority in the lower house, which is at 233 seats from a 465-seat chamber. And in regards to the potential risk going forward, the reason why there could be some risk, as some political analysts think, is because it does open up the door for other parties to potentially snatch some seats away. For example, the LDP’s former partner, CTO, has now partnered with another party known as the Constitutional Democratic Party of Japan, and they formed a new alliance known as the Centrist Reform Alliance. And, obviously, they hope to take some seats away.
However, given that the LDP has officially announced that they’ve called a snap election, in order to minimize or limit the risk, they’ve only left a few weeks up until the 8th of February. This is to ensure that their other parties aren’t able to build a sizable or strong campaign against them.
Great insight, thank you. And in January, in regards to timing, why has the KH Cabinet considered calling a snap election now?
There are two main reasons why a snap election is usually called. The first reason is to seek public approval for a major initiative — for example, fiscal expansion. And the second reason is to take advantage of high approval ratings to potentially gain more seats. In this case, it looks like the LDP is trying to capitalize on or take advantage of both. Takaichi’s own personal approval rating is fairly high, depending on the source or the poll. It ranges from around 60 to 80%. And obviously, they’re looking to use these two reasons to gain more seats.
Understood. And what does the snap election signal to the market and investors?
Since the rumors and then the confirmation came out a few weeks ago, it has been positive for investors. So you would’ve seen that the stock market has been creeping higher. What it essentially means is that if the LDP is able to achieve a favorable outcome in the upcoming snap election, it means that they will have more power and more decision-making freedom when it comes to fiscal expansion and the upcoming budget. Essentially, what this is going to do is boost the Taka trade, which is essentially long stocks, short bonds, and short FX — or Japanese yen.
Gotcha. And lastly, this brings us to how this all may affect asset classes such as bonds, yen, and stocks.
I’ll start with bonds or yields first, then move to FX, and then finish with equities. In terms of the bond market or yields, we would’ve seen Japanese 10-year Japanese government bond, or JGB, yields trading as high as 2.3% earlier this week, and also 30-year JGBs trading as high as 3.7%, which is the highest in decades. In the event that the LDP is able to spend more, this means that there will be more bonds that need to be issued. And as there is an increased bond supply, it means yields will continue to trend higher. In addition, the LDP has signaled that there may be potential consumer tax cuts. For example, there are some products now where the sales tax percentage is around 8% to 10%, and the LDP may drop this down to 0% for the next two years, which may potentially worsen Japan’s fiscal position.
What this also leads to is that if there are tax cuts, obviously consumers will be able to spend more. But if they are able to spend more, it means that inflation may stay above 2% and higher than the Bank of Japan, or BOJ, expects, and it may force the Bank of Japan to hike earlier than they would like. The next area I’ll touch on is FX. Although there was a small bounce in the FX or Japanese yen market recently, it does indicate that the US dollar to Japanese yen may stay at a relatively weak level.
Many investors that we’ve been speaking to have been curious and wondering — as interest rate differentials between the US and Japan narrow, isn’t this positive for the Japanese yen, and shouldn’t investors expect the Japanese yen to strengthen? To take a step back, the US interest rate and Japan interest rate differential is widely looked at by investors. As US interest rates trend lower, this means that money is expected to flow out of US fixed income instruments and rotate into, for example, Japanese fixed income instruments. And obviously, you need to use Japanese yen to buy Japanese government bonds or fixed income instruments. What’s been the reason why this isn’t happening is that in the past, the correlation between US and Japan interest rate differentials has been quite close. But going forward, the interest rate differential has started to break down in the last couple of years. There is a macroeconomic theory known as the Impossible Trilemma, or Impossible Trinity, and this theory states that a country is able to achieve only two of three goals, and not all three together.
These goals would be:
Number one, free flow of capital.
Number two, independent monetary policy.
And number three, a stable exchange rate.
In Japan’s case, they’ve chosen number one and two. They’ve chosen a free flow of capital, and they’ve also chosen an independent monetary policy, at the expense or sacrifice of a stable exchange rate. What this means is the Bank of Japan, or the Central Bank of Japan, is able to artificially hold interest rates lower than the market expects. And in this case, the longer they hold the interest rate lower, the weaker the Japanese yen will become. And lastly, for equities: in the event that the LDP is able to achieve a favorable result in the upcoming election, obviously this is going to be positive for the equity market, as there will be a bit more fiscal stimulus. Looking back at history, in the last seven or nine elections, within the first three to six months, the TOPIX index has moved up with some sort of positive gain. And just lastly, in terms of the sectors that may do well: the sectors which are supported by fiscal expansion. So, for example, defense — as the Takaichi Cabinet is looking to spend a lot more on defense — so defense sectors will do well. Also, with a potential sales tax cut for consumer products, consumption sectors will generally do well, and also financials and banks, as interest rates tend to rise.
That’s great. Thank you, Nick for sharing the outlook with us. It was truly interesting, and we’ll see you soon again. Thank you.
Thank you very much.
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I found that IB doesn’t have Type II financial instruments business license under the Japan financial law, which is required to do brokerage for TONA futures. IB should step up and support more products in the Japanese markets.