The “Takaichi Trade”: What Japan’s Election Landslide Can Teach Us About Markets

A landslide win sent Japanese stocks to record highs this week - but the bond market isn't cheering.

On February 8, Japan’s Prime Minister Sanae Takaichi won a snap election victory, securing a two-thirds supermajority in the lower house of parliament.

Investors wasted no time celebrating. Japan’s “Takaichi trade” went into full swing, with Japanese stocks surging to all-time highs. On Tuesday, Japan’s Nikkei 225 index climbed 2.28%, and the broader Topix index gained 1.9%.

The election result didn’t surprise anyone. But the rally that followed has been loud enough to raise a different question: how solid is it?

Even if you never touch a Japanese stock, this matters. Japan is the world’s fifth largest economy, and its moves ripple into the index funds many of us own. But this isn’t just about a rally, because it tells us a lot about how markets react to power, policy, and the price of borrowing.

Let’s dive in.

Why Markets Love a Big Mandate

A mandate is basically when voters have given a leader enough support to actually push through an agenda. Markets love it, because they favour clear decision-making.

A supermajority takes that up a level, meaning fewer roadblocks, faster policymaking, and less near-term political risk.

Takaichi's government has signalled “responsible proactive fiscal policy”, which is a fancy way of saying: use government spending to support growth. That includes support for sectors like AI, semiconductors and defence, and measures to spur corporate investment in key tech areas.

The combination of political stability and growth-friendly promises is what sent the Nikkei and Topix to record levels so quickly.

But record highs don’t automatically mean strong foundations. Some analysts now warn there may be a disconnect between stock prices and economic fundamentals, and describe the current rally as increasingly fragile.

Two Markets, Two Stories

Stock prices told one story after the election. Bond prices told another.

This split matters because it shows you how different parts of the market think about the same news.

Stocks rallied on the political win. A strong mandate means less uncertainty, faster decision-making, and the promise of growth-friendly spending. Investors liked what they heard and bought in.

Bonds got cautious about the price tag. More government spending means more borrowing. And when the government borrows more, investors who buy those bonds ask: can you afford this? Will it cause inflation? Should we demand higher interest rates?

Japan's 10-year government bond yield jumped to 2.29% right after the election, then eased back. That's investors saying: "We want to be paid more to lend you money because we see more risk."

The real warning sign came earlier, in January, when tax cut proposals pushed the 40-year bond yield briefly to 4%. That's a big move, and it showed long-term lenders were genuinely worried about how sustainable the fiscal plans would be.

Here's what that means in plain terms: when bond yields rise, borrowing gets more expensive for everyone - governments, companies, and eventually people taking out mortgages. So even if stocks are celebrating, rising bond yields can slowly tighten financial conditions.

The Currency Question

Then there's the yen, which has stayed relatively calm so far at around ¥156.60 against the dollar.

But some analysts think it could weaken toward ¥160 as investors question how Takaichi will fund her plans. A weaker yen can actually help Japanese exporters earn more, which is partly why stocks have done well. But it's also a sign that currency markets aren't entirely convinced about the fiscal story either.

The pattern you're seeing is this:

• Stocks cheer the growth story
• Bonds price in the borrowing risks
• Currencies stay calm at first, then may weaken if funding doubts grow

This isn't unique to Japan. It's how markets work when big fiscal plans meet investor skepticism.

The Open Questions That Will Drive What Happens Next

The rally was the easy part. The harder part is what comes next, because the mandate is clear but the policy details still aren’t.

• How big will fiscal expansion be, and how quickly will it arrive?

Why markets care: spending can boost the economy fast, but if productivity doesn’t rise fast enough, inflation pressure can build and rates can go up. Analysts also warn enthusiasm may be running ahead of clarity on how policies will be funded.

• Will temporary policies turn into permanent ones?

Why markets care: temporary measures are easier to fund than long-lasting ones. If spending or tax breaks stick around, investors may worry more about the long-term debt path.

• Can the government keep bond markets calm as it borrows more?

Why markets care: when supply and demand in bond markets get out of balance, yields can jump faster than anyone expects.

• How will the Bank of Japan normalise policy with inflation close to its 2% target?

Why markets care: if investors think the central bank cannot act freely because government finances are under pressure, inflation expectations can rise and long-term bonds can swing more.

What Long-Term Investors Should Know

So what should you take away from this?

1. Stocks can jump quickly on a big political win, but bonds can be the early warning sign if worries about borrowing and inflation are building.
2. A supermajority makes action easier, but it doesn’t make the trade-offs disappear. If investors doubt fiscal sustainability, yields can rise, and that can tighten financial conditions.
3. What happens in Japan doesn’t stay in Japan. Its market moves can filter into global funds and global sentiment, especially when equities rally while yields rise. And if the rally is as sensitive to currency moves and global shocks as some warn, that sensitivity matters for anyone holding broad funds.
4. The best clue is the gap between markets. When stocks celebrate but long-term yields climb, the market is basically saying: “We like the growth story, but we’re pricing the risks too.”

The Real Lesson of the “Takaichi Trade”

Record highs are the headline, but the more useful signal is what’s happening underneath.

A landslide win can spark a fast stock rally because it reduces near-term political risk and raises hopes for growth-focused policy, but the bond market reacts differently, because it is constantly weighing fiscal credibility, inflation risk and the cost of funding those plans.

And this stock rally has an extra layer of fragility: the gains are being driven as much by investor sentiment and momentum as they are by economic fundamentals. That means there's less cushion if the policy details disappoint.

The stock rally is only half the story. Bond yields and currency moves fill in the rest - and together, they tell you whether investors see sustainable growth, or just an expensive promise.

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