As Japan approaches its snap election on 8 February 2024, Prime Minister Sanae Takaichi is spearheading efforts to rejuvenate the economy amidst ongoing worries about the yen’s value. While she seeks a mandate for her expansionary fiscal policies, market reactions have sparked concern over fiscal sustainability.
The Election Context
Takaichi’s Liberal Democratic Party (LDP) is gaining momentum, with preliminary surveys indicating they may increase their seats in the lower house from 198 to beyond the 233 majority out of 465 available. This shift could heavily influence her economic plans.
Yen’s Struggles
- The yen has been in a protracted decline, raising fears about Japan’s fiscal health.
- Current bond yields have surged to record highs, further complicating the currency’s outlook.
- Toshinobu Chiba, a Tokyo-based fund manager, predicts a potential plunge of the yen to as weak as 180 per dollar if Takaichi secures a decisive win.
Takaichi’s promise to suspend the consumption tax on food has also led to worries about a potential fiscal fallout, given that this tax contributes approximately five trillion yen (S$41.21 billion) in annual revenue without a clear plan for its replacement.
Market Reactions
Despite hawkish signals from the Bank of Japan, the yen recently fluctuated significantly—soaring from around 159.20 to 153.30 per dollar before settling at 154.75 Tuesday. However, analysts suggest that government intervention can only offer temporary relief, as the underlying concerns about Japan’s debt (already at 230% of GDP) linger.
Looking Ahead
As the election nears, Takaichi’s ability to navigate these economic waters will be closely watched. Chris Scicluna from Daiwa Capital Markets Europe remarked that while challenges exist, there are also favourable trends such as returning inflation and signs of economic growth.
Investors are keenly aware that the political landscape may complicate efforts to stabilise fiscal policies, making the upcoming election a pivotal moment for Japan.