What Japan’s election means for investors – plus two fund ideas

After just three months in office, Prime Minister Sanae Takaichi called an election to secure a clear mandate. The result gives her a commanding position in parliament and gives markets a rare dose of political certainty.

Her Liberal Democratic Party (LDP) won a two-thirds majority in the lower house, the first time this has happened in post-war Japan, and it means the government now has the numbers to pass legislation far more easily. The election result ushers in a period of political stability in Japan, something investors tend to welcome, particularly in an uncertain global environment.

This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Remember, all investments and any income from them can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

What does the result mean for Japan’s economy?

Takaichi’s election campaign focused on change, presenting herself as a leader who understands the pressure rising prices are putting on households. She has spoken about cutting consumption tax and supporting consumers through subsidies for energy bills, while also promising to project a stronger Japan on the global stage.

She has signalled support for greater investment in strategic industries like technology, semiconductors, AI and defence. These areas are seen as important for boosting productivity at home and strengthening Japan’s position internationally. The election result gives her more freedom to push these priorities forward, though the detail is still to come.

That lack of clarity has left some businesses cautious as companies are wary of higher government borrowing and potential tax changes. There are also concerns about labour shortages. Japan’s population is ageing rapidly and Takaichi has taken a tougher tone on immigration. But some businesses argue that access to foreign workers is essential to support growth.

Some of the recent fiscal support is also seen as election driven. Measures like subsidies for electricity and gas were designed to ease inflation in the short term. Capital Economics expects inflation to fall by around 1% this year, helped by these policies.

That said, the proposed suspension of consumption tax may not take effect until next year. With the economy already growing modestly and government debt high, the scope for significantly more spending could be limited.

How did markets react?

Japanese markets responded positively and jumped sharply the day after the election, hitting record highs.

Investors appear encouraged by the size of the LDP’s victory and the prospect of stable government. While a short timeframe, Japanese shares have outperformed global markets since Takaichi took office last October, helped by promises of fiscal support, improving corporate governance and a weak yen.

Bond markets were more cautious, but moves were modest. Japanese government bond yields edged higher but had already risen in the run up to the election reflecting expectations for increased borrowing. Rising yields have caused some concerns around Japan’s financial strength, but others view this as a period of normalisation as yields are now more in line with international peers.

The Japanese yen was subdued.

Normally, higher bond yields support a currency. But ongoing weakness in the yen reflects uncertainty over how future spending plans will be funded and ongoing questions about Japan’s long-term growth prospects.

What does this mean for investors?

For investors, the election result removes a key source of uncertainty. Political stability tends to be supportive for markets, and Japan now stands out as having a clear, long-term administration in place.

However, currency movements will be important. A recovery in the yen could be a headwind for Japanese shares in the short term. Overseas investors would feel the effects more as a stronger currency reduces returns once converted back into sterling. That said, a stronger yen is good for importers and domestic manufacturers, and more of an issue for exporters.

Elsewhere, Japanese markets still look attractively valued compared with its long-term average and some global markets, including the US, which could offer longer-term support for share prices if company earnings grow or remain robust.

For bond investors, higher yields might continue as the economy improves. The Bank of Japan remains cautious, and while there may be tweaks to bond buying later this year, any major shift in monetary policy looks unlikely unless there’s a serious economic shock.

For currency investors, the picture’s mixed.

The yen is very weak by historical standards, and with election risk now behind us, it may be more likely to strengthen than weaken from here, though volatility should be expected.

Investment ideas for Japan

For those seeking exposure to Japan, here are two fund ideas that use different approaches to investing in the region.

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

For more details on each fund, its charges, and specific risks, use the links to their factsheets and key investor information.