Japan’s elections: Economic outlook, Yen trends, and what’s next for business

Japan’s recent House of Representatives election delivered a historic victory for the Liberal Democratic Party (LDP), setting the stage for Prime Minister Takaichi’s administration. This political shift is expected to have far-reaching impacts on Japan’s economy, foreign exchange markets, and business landscape. Kentaro Koyama, Chief Economist for Japan at Deutsche Bank, offers insights into the potential ramifications of these developments.

Full transcript of the video:

Q1: What’s the impact of Japan's recent election results on businesses?

The LDP secured a historic victory in the House of Representatives election. This paves the way for Prime Minister Takaichi’s stable, long-term administration. The impact on the FX market is complex. If her "responsible proactive fiscal policy" is seen as large-scale stimulus, it could lead to yen-selling pressure due to concerns about fiscal discipline. On the other hand, expectations for realistic policy revisions could lead to a stronger yen. Our house view anticipates a gradual yen appreciation for the remainder of the year. While this reduces exporters' competitiveness, it lowers import costs for many companies. These savings will ultimately be passed on to consumers, benefiting household budgets.

Q2: Could concerns about fiscal discipline impact foreign investors' confidence in Japan?

Concerns are simmering over tax cuts with unclear funding. This risks a "bad rise in interest rates" due to lower confidence in government bonds. With her landslide victory, PM Takaichi will likely prioritise "responsible proactive fiscal policy." The focus is now on post-election "National Council" discussions. Decisions on consumption tax cuts without financial backing would intensify fiscal concerns. A "bad rise in interest rates" would shake confidence in Japan's public finances. This is a negative signal for foreign investors who value Japan’s stability. If they withdraw funds, it could significantly impact the entire financial market. Conversely, if stimulus boosts growth expectations, a "good rise in interest rates" remains possible. The immediate priority is passing the FY2026 budget as quickly as possible.

Q3: Will Japan's new administration prioritise short-term measures like tax cuts over essential labor and digital reforms?

The immediate priority is passing the FY2026 budget as quickly as possible. Consumption tax cuts will likely be a major topic at the post-election "National Council." Government focus will inevitably shift toward urgent economic measures and fiscal management. However, the LDP's strong political base offers a golden opportunity. This is the time to tackle long-postponed structural reforms with a long-term view. Work style reform and digitalization are indispensable for Japan's future. With a long-term administration in sight, the true test begins. Can the administration move beyond immediate economic measures? The challenge is to boldly advance the reforms essential for Japan’s growth.

Q4: Where might we see positive change in the Japanese economy?

I have expectations in two key areas. First is the "resolute implementation of structural reforms." Using this strong mandate, I hope to see PM Takaichi promote deregulation. Labor market reforms and AI investment are essential for Japan's growth. The other is the "normalization of monetary policy." Political stability allows the BOJ to raise rates based on economic conditions. Our forecast for the next interest rate hike is in April. This should curb excessive yen depreciation and correct economic distortions. If these policies mesh well, Japan can transition to a new stage of growth. That is where I see a ray of hope for the future.