Following a landslide election victory for Japanese Prime Minister Sanae Takaichi's Liberal Democratic Party, markets are bracing for a shift toward expansionary fiscal policy focused on defense and artificial intelligence, according to an analysis by HSBC Taiwan.
The LDP secured 316 seats in the House of Representatives, achieving a "super majority" that provides a stable foundation for governance.
Lee Sheng-kai(李勝凱), senior vice president of International Wealth Management and Premier Banking at HSBC Taiwan, said the election result gives the Japanese government greater leeway to implement strategic investments. However, he warned that balancing these aggressive measures with fiscal discipline remains a critical challenge.
Fiscal Expansion vs. Discipline
Lee noted that while expansionary policies are often accompanied by concerns over widening deficits and inflationary pressures, the government is likely to mitigate these risks by reviewing expenditure structures and cutting unnecessary subsidies.
A key campaign promise under scrutiny is the proposed two-year suspension of the 8% consumption tax on food and beverages.
“Given the need to simultaneously advance fiscal expansion and tax reduction policies, such proposals may undergo scale adjustments or include early termination clauses to achieve a compromise between economic stimulus and fiscal balance,” Lee said.
Interest Rates and the Yen
On the monetary front, HSBC forecasts that the Bank of Japan could raise interest rates by 25 basis points as early as July, bringing the policy rate to 1%.
Lee cautioned that the central bank retains flexibility regarding the timing of rate hikes, with decisions heavily dependent on inflation trends, economic recovery momentum, and the yen's performance.
In foreign exchange markets, the U.S. dollar-Japanese yen exchange rate is expected to remain volatile in the first half of the year. Lee stated that the Japanese government might intervene if excessive depreciation threatens import costs. Volatility is expected to subside in the second half of 2026 as markets digest the new policy directions.
HSBC currently maintains a neutral view on Japanese government bonds and the yen.
“Future developments will require close attention to the Japanese government's policy balance between fiscal expansion and fiscal discipline, as well as the Bank of Japan's actual implementation of interest rate hike pacing,” Lee said. （Related： Apple's China Exit Is ‘Nonsense,' Author Warns, as India Falls Short ｜ Latest ）
