Key Moments
- TD Securities analysts say an absolute majority for PM Takaichi could push JGB yields higher and steepen the curve.
- They expect higher inflation could drive USD/JPY even higher.
- The Bank of Japan and major domestic institutions may buy bonds during yield back-ups, providing market support.
Election Outlook and Policy Implications
TD Securities analysts Prashant Newnaha and Alex Loo explain how Japan’s Lower House election could affect fiscal policy and USD/JPY. They assume PM Takaichi wins an absolute majority. This would likely reinforce her push for more fiscal spending.
As a result, markets may push Japanese government bond (JGB) yields higher, especially for the 10-year segment. Consequently, the yield curve could steepen. Additionally, this may raise inflation expectations and strengthen USD/JPY.
Yields, Curve Dynamics, and USD/JPY
The analysts summarize their expectations:
| Focus Area | Analysts’ View |
|---|---|
| Election outcome | PM Takaichi likely to win an absolute majority |
| Fiscal policy | Majority win would boost her fiscal spending agenda |
| JGB yields & curve | Yields expected to rise, steepening the curve, especially at 10 years |
| Inflation expectations | Could increase if yields rise as expected |
| USD/JPY | Projected to strengthen with rising inflation expectations |
The analysts note: “An absolute majority should drive yields higher and steepen the curve. If inflation expectations rise, USD/JPY should move higher too.”
Role of BoJ and Domestic Institutional Demand
Newnaha and Loo also highlight market support during yield back-ups. They write: “We expect buyers to emerge because 1) the BoJ will likely stabilize the long end through bond purchases, and 2) Japanese institutions such as SMBC and Meiji Yasuda plan to buy JGBs this year.”
This combined support could limit excessive volatility in long-term yields. Still, yields may rise as fiscal and political developments unfold.
Focus on February 8 Lower House Election
Market attention is focused on the Feb 8 election. “All eyes are on the upcoming Lower House elections. We expect PM Takaichi to win an absolute majority. This would likely strengthen her fiscal agenda. Markets would push JGB yields higher and steepen the curve, especially at 10 years,” the analysts said.
They link this political outcome to a chain reaction affecting fiscal policy, bond yields, the yield curve, inflation expectations, and USD/JPY movements.
TradingPedia.com is a financial media specialized in providing daily news and education covering Forex, equities and commodities. Our academies for traders cover 
