Following the LDP's gains in the Lower House election, the yen strengthened and the US dollar weakened in financial markets. Long-term interest rates remained broadly flat, while the stock market responded positively and expectations grew for future policy adjustments. The Bank of Japan's additional rate hike is expected in September.
On 8 February 2026, the day of voting and vote counting for the Lower House election, the LDP won a postwar-record 316 seats. While the stock market rose in response, long-term interest rates remained broadly flat in the bond market, and the yen strengthened against the US dollar in the foreign exchange market. Takahide Kiuchi (木内 登英), executive economist at Nomura Research Institute, cited the stability of the administration's political base and uncertainty over the implementation of proactive fiscal policy as the background to these developments, and pointed out that expectations for policy adjustments may have curbed fluctuations in interest rates and foreign exchange rates.
As questions emerged over the sustainability of the stock market's rise, views were expressed that factors supporting yen depreciation could weaken and that a defense line around ¥160 was serving as a market check. Developments in the US and China, the outlook for US interest rates, and President Trump's policy stance were also cited as factors affecting the yen, with an explanation that they could also affect the timing of the Bank of Japan's rate hikes.
Views were expressed that policy adjustments, such as the possible postponement of an increase in defense spending and a review of consumption tax cuts, could help curb rising interest rates. It was also pointed out that the contribution of the two-year tax-cut measure to the election result was limited, suggesting the possibility of settling on new fiscal measures following a national conference. Many expect the Bank of Japan's additional rate hike to come at its September meeting, with the decision expected to take into account cost-push factors and global interest-rate trends.
The Bank of Japan's additional rate hike indicates an intention to prioritise monetary policy normalisation while showing consideration for the administration. Takahide Kiuchi (木内 登英) introduced market views that the Bank of Japan is considering an additional rate hike in the first half of 2026, while pointing out that the timing could be delayed depending on the direction of the Takaichi administration's fiscal policy and developments at the Federal Reserve. The article also notes the outlook for slower CPI growth in 2025, stating that whether a rate hike is necessary will be determined by comparing interest rates with the neutral rate.