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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is head of Asia-Pacific portfolio management at Pimco
The historic election victory in Japan for the ruling Liberal Democratic Party has granted Prime Minister Sanae Takaichi the strongest mandate in the country’s postwar era and raised hopes of a shift towards growth-oriented policy.
Yet political clarity does not guarantee market clarity. For investors, the more decisive direction of travel still leaves unanswered questions about the scope and scale of fiscal expansion, debt management, the pace of monetary normalisation and foreign policy. The handling of these “known unknowns” will determine whether markets ultimately reinforce or challenge Japan’s post-election optimism.
The LDP’s two-thirds supermajority positions Takaichi to consolidate power within the party. It also strengthens the durability of her agenda and raises the stakes for markets assessing whether the government can deliver on its ambitions.
Voters’ endorsement of a growth-first strategy reflects years of frustration with economic stagnation. Weak growth has weighed on household income and wealth accumulation. Pandemic-era import price shocks, lagging wage gains and a weaker currency further squeezed living standards.
Against this backdrop, Takaichi’s principle of “responsible proactive fiscal policy” resonates with households, particularly her argument that fiscal sustainability ultimately depends on stronger growth. This challenges the mainstream assumption that Japan’s growth constraints are primarily fiscal. Her focus on investment in defence and energy, alongside growth investment in technology, is economically intuitive and politically appealing. The question for investors like Pimco, however, is whether implementation can match intent. They must grapple with a series of unanswered questions that will shape the policy path ahead.
First, the scope and scale of fiscal investment remain uncertain. The 2026 budget is largely fixed, but more details on the growth strategy are expected in June. The economic impact will depend on whether investment raises productivity quickly enough to prevent additional inflationary pressure and higher interest rates in a post-deflation environment. Fiscal stimulus boosts demand swiftly, whereas productivity gains from investment in technology such as AI materialise more slowly and only when supported by deregulation and complementary reforms.
A second area of uncertainty concerns permanent or semi-permanent fiscal expenditures. A temporary consumption tax cut on food advocated by Takaichi is modest in scale, but any extension could alter Japan’s long-term debt trajectory. Similarly, any sustained increase in defence spending beyond the current 2 per cent of GDP could have lasting implications.
Third, debt management policy remains unclear. Japanese government bond markets have already reacted negatively amid broader concerns over fiscal credibility. The 40-year yield briefly hit 4 per cent after the consumption tax idea emerged. The yield rise was excessive, amplified by a technical supply-demand mismatch. Effective communication and flexible issuance from the Ministry of Finance could help mitigate market stress as policy evolves.
Fourth, monetary policy adds a further layer of uncertainty. Japan is no longer in deflation and inflation is close to the Bank of Japan’s 2 per cent target, with risks skewed to the upside. That strengthens the case for policy normalisation. Any perception that fiscal policy is constraining the BoJ would probably push inflation expectations higher, raising volatility in long-term JGBs.
A fifth challenge comes from foreign policy. While the US alliance remains central, deepening ties with regional partners is increasingly important. Economic proximity to China underscores the urgency of managing bilateral tensions, even as Takaichi emphasises supply-chain resilience and a gradual reduction in economic dependence on China over time.
Market dynamics already reflect the tension inherent in these uncertainties. Rising JGB yields indicate bond investors are demanding a premium for policy risk, while equity markets appear to assume a smoother resolution of the remaining unknowns.
The key question for investors is not whether the government’s intent is growth positive, but whether execution can anchor inflation expectations, preserve fiscal credibility and limit unnecessary increases in term premiums — the extra returns investors demand for buying longer dated debt. In that sense, Japan after the election landslide is less about the mandate itself and more about how markets price what remains unresolved.
