Commerzbank’s Volkmar Baur links Japan’s political landscape to Japanese Yen dynamics. Prime Minister Sanae Takaichi’s landslide victory and two-thirds majority enable expansive but ‘responsible and proactive’ fiscal policy, including a temporary VAT cut on food. Markets are expected to stay nervous about higher deficits, yet Commerzbank sees Japan’s net debt and asset position as more reassuring.

Reforms, budget risks and market nerves

"Prime Minister Takaichi's Liberal Democratic Party (LDP) won 316 of 465 seats in the new elections on 8 February. This is more than ever before in the post-war period since 1955."

"Thanks to its two-thirds majority, the LDP will also have full control over all committees in the future House of Representatives, including the Budget Committee. The LDP will therefore be able to implement its vision of a ‘responsible and proactive’ fiscal policy without having to seek compromises with other parties."

"Following the election victory, Takaichi emphasised that she intends to keep her promise to suspend VAT on food for two years. According to estimates, this could cost around JPY 5 trillion per year, which corresponds to approximately 0.8% of Japan's GDP."

"The market is therefore nervous that a further significant increase in the budget deficit could lead to an unsustainable fiscal situation. However, we view the situation somewhat more calmly."

"All in all, this leaves a net debt of just under 70% of GDP, which makes Japan's debt appear much less worrying."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)