What Are the Implications of Sanae Takaichi’s Election Gamble? Will the Yen Rebound or Remain Sluggish?

Yen Exchange Rate Test - TradingKey

TradingKey - The opening act of 2026 is turning out to be more intense than Wall Street anticipated. With only a few days left before the Japanese House of Representatives election on February 8, incumbent Prime Minister Sanae Takaichi is undertaking the biggest gamble of her political career.

As the first female prime minister in Japan's constitutional history, Sanae Takaichi quickly stabilized the Liberal Democratic Party's (LDP) base with an "Iron Lady" persona after succeeding Shigeru Ishiba in October 2025, whose approval ratings had collapsed. However, the real test lies in whether she can use this snap election to secure a "sacred sword" for long-term governance, allowing her to fully implement her expansionary economic policies, which carry strong Abe-esque undertones.

Influenced by factors such as the Japanese general election and surging government bond yields, yen volatility has increased significantly recently. After failing to challenge the 160.0 level, USD/JPY saw a sharp pullback, with the yen appreciating nearly 4% over three trading sessions. However, USD/JPY bottomed out and resumed its climb on January 28, suggesting the yen could weaken further or lose the 160.0 handle.

Will the yen continue to weaken before the election? Can the yen stage a desperate counterattack after the election is over? The answers are hidden in Sanae Takaichi's ballot box and on Bank of Japan (BoJ) Governor Kazuo Ueda's decision-making table.

Can the Iron Lady Sanae Takaichi win? Look at the public opinion test!

According to polls by Nikkei and several authoritative institutions in early 2026, the Takaichi cabinet's approval rating has remained remarkably high at 70%-74%. This is something of a miracle against the backdrop of the frequent "short-lived cabinets" in Japanese politics in recent years.

The previous Ishiba cabinet's approval rating once fell below 20% due to mishandling of the "slush fund" scandal and internal party divisions. After taking office, Takaichi quickly garnered support from conservatives and independents with her tough conservative stance and clear reform slogans.

Regarding the upcoming general election, the market generally believes Takaichi has a high probability of winning. The Liberal Democratic Party (LDP) is likely to secure a simple majority on its own, and the ruling coalition with Komeito might even aim for an "absolute stable majority" of seats.

Although Takaichi's personal image is clean, the political funding scandals (involving the former Abe faction, etc.) within the LDP remain a weakness targeted by opposition parties (such as the Constitutional Democratic Party and the Japan Innovation Party).

If Takaichi wins big, it means political stability, and "Sanaenomics" will go full throttle. Market risk appetite may increase, benefiting the Japanese stock market, but the impact on the yen exchange rate is more complex.

"Sanaenomics": The Fiscal Accelerator and the Exchange Rate Brake

Sanae Takaichi's economic policy is known as "New Abenomics" or "Sanaenomics," the core of which is: bold fiscal spending + building crisis resilience.

Takaichi is a typical proponent of fiscal expansion. She advocates for drafting a massive supplementary budget for disaster prevention and mitigation, technological R&D (such as AI and semiconductors), and national defense construction.

Fiscal expansion usually means increased government bond issuance and an increased supply of yen in the market. Without corresponding monetary tightening, this will exert downward pressure on the yen.

However, the current excessive depreciation of the yen has already led to a surge in imported energy and food prices, severely eroding national purchasing power and becoming an invisible bomb that could lower the cabinet's approval rating.

After winning the election, to appease public discontent, Takaichi may verbally stop excessively promoting depreciation and might even tacitly allow limited intervention or moderate interest rate hikes by the central bank. But at her core, she still needs a weak yen to support the earnings of Japanese multinational giants, thereby maintaining stock market prosperity.

"Loose Lips Sink Ships"? Takaichi's Yen Comment Controversy

Just during the final sprint before the election (late January 2026), a remark by Sanae Takaichi almost caused a "rollover."

In a campaign speech, Takaichi hinted that "yen depreciation has a positive side for the Japanese economy," which was quickly seized upon by opposition parties to blast her for "ignoring the suffering of the people" and "not knowing the price of bread."

This episode exposed the vulnerability of the Takaichi cabinet; she does not dare let the yen collapse before the election. This means that around the February 8 election, if speculative capital maliciously shorts the yen, there is a very high probability that the Ministry of Finance will conduct verbal or even physical intervention.

What is Kazuo Ueda's game plan?

As of January 2026, the Bank of Japan maintained its policy rate at 0.75%. Compared to the negative interest rates of a few years ago, 0.75% is already a huge step forward, marking Japan's formal farewell to the era of deflation.

At the January press conference, Kazuo Ueda stated that although the economy is recovering moderately, it is necessary to observe the results of the spring labor-management negotiations (Shunto) and uncertainties in the overseas economy (particularly policies of the Trump administration in the U.S.).

Ueda has recently repeatedly emphasized a "virtuous cycle" where wage increases drive price increases. If the 2026 Shunto results show wage growth outpacing inflation, the probability of the central bank raising interest rates to 1.0% in the second half of the year is extremely high.

Currently, the yield gap between the U.S. and Japan remains huge. As long as the Bank of Japan keeps the rate at 0.75% without haste and the Federal Reserve does not cut rates significantly, the yen lacks the momentum for a major appreciation.

The foundation of the yen's exchange rate lies in Japan's economic fundamentals

Data from December 2025 shows that Japan's core CPI is still fluctuating in the 2.1% - 3.0% range, exceeding the BoJ's 2% target for 45 consecutive months. This inflation is largely cost-push, driven by rising import costs due to yen depreciation, rather than demand-pull. This is painful for ordinary consumers.

Additionally, although nominal wages are rising, real wage growth after adjusting for inflation remains weak. This is an urgent problem that Sanae Takaichi needs to solve and is one reason for the yen's long-term lack of support.

Bank of America maintained its bearish view on the yen in its latest report, predicting that USD/JPY will remain above 150 for most of 2026 and may even test the 160 high in the first quarter.

JPMorgan Chase pointed out that as long as the U.S.-Japan interest rate differential remains high, carry trades will return, suppressing any yen rebound.