Japan election preview: What a big LDP win could mean for the economy, bonds and the yen

Markets are treating the February 8 election as a macroeconomic event, not just a political one. A big LDP win would likely be read as a green light for “Takaichi trade” reflation and fiscal activism, which can keep JGB yields biased higher (more issuance risk, higher term premium, less BoJ dominance over the curve). That mix is usually yen-negative in the short run, even if the “return to normal” story sounds healthy over the long run.

The key tension is this: Japan wants normalization (higher yields, higher wages, steadier inflation), but it does not want USD/JPY sprinting into 160–162 because it worsens import inflation right before/after an election. So the base case becomes a two-handed regime: fiscal/curve pressure pushing yields up, while Tokyo tries to smooth FX via intervention/jawboning to slow the pace rather than reverse the trend.

ING didn't take into account 5 very important things:
1. Higher rates will have significant pressure on the budget (jpy negative but check point 3)
2. WH is not happy with the trade balance and Japan is the easiest counterparty to deal with to normalize it. (jpy positive, I would even say jpy critically positive)
3. Katayama factor. Katayama is a pure technocrat. We may expect such things as first austrlain order or last ny order style of battling with carry traders. She will make everything possible to turn off carry to limit rates raise causing by carry trade. 23.01 showed that market is very thin and 150+ based only on carry trade so I would not suggest to carry usdjpy long over 157 - hammer will be painful.
4. Export product and services competiveness. Currently exporters are getting +7.3% from the fx rate over the planned rate. So back to normal may be also - back to normal margin.
5. We see pure buy the rumor. You know what's going next.
Overall, we will see usdjpy 135-140 in the 1st half of the year.

I don't understand how people who make the best steel and electronics can't figure out economics. At this point they're a global nuisance in constant need of bailouts/intervention.