The "Iron Lady" controlling Japan is currently impacting the fate of the US stock market and the Japanese yen.

With the current Japanese Prime Minister Sanae Takaichi's political party and allies holding more than two-thirds of the seats in the House of Representatives, this so-called "Iron Lady of Japan" has for the first time since Shinzo Abe consolidated a high level of political power. This has given her almost presidential-like powers to decide on tax policies, defense policies, and relations with the Bank of Japan. As a result, the "Takaichi trade" has once again come into market focus: the yen exchange rate has fallen to multi-year lows, while Japanese government bond yields are also rising. While many in the political sphere approve of Sanae Takaichi's policy direction, the key issue lies in the need to carefully balance implementation: how to increase government spending while avoiding worsening debt burdens; how to build a sustainable yen interest rate differential trading strategy - a strategy that may profit when planned smoothly, but may pose risks if the market environment changes. For investors focusing on the S&P 500 index as their main profit target, the importance of the Japanese election lies not in whether it is worth paying attention to, but in its impact. This is a core variable that truly affects global interest rates, Japanese bond flows, stock market growth, and value style switching in the context of the next stage of global reflation. Who has truly won? What new powers will Sanae Takaichi gain? The results of the February 8th election have given the Japanese government the power of efficient decision-making. Currently, the ruling coalition led by Sanae Takaichi's Liberal Democratic Party has secured around 316 seats, and together with the Japan Innovation Party, have a total of 350 seats, surpassing the threshold for an absolute majority in the House of Representatives. This means that the ruling coalition will control the committee agenda, and more importantly, the legislative process will be significantly streamlined with minimal resistance to policy implementation. In simple terms: the ruling coalition of Japan (Liberal Democratic Party + Japan Innovation Party) holds more than two-thirds of the 465 seats in the House of Representatives. In the Japanese political system, the House of Representatives has legislative decision-making power, while the House of Councillors can only delay or temporarily reject, but cannot ultimately stop the enactment of laws. Once the ruling party secures an absolute majority in the House of Representatives, the Senate's obstruction is essentially a mere formality and can only temporarily delay. In other words, the 350 seats in the House of Representatives are highly influential: previously, the government had to negotiate and compromise with the opposition and swing allies, but now it has become an efficient legislative machine that can pass almost any desired bill. The impact of the election on the stock market is direct: election promises will be enacted into laws more quickly, reflecting in stock prices, the yen, and Japanese bond prices. This may even restart discussions on constitutional reform, but it should be noted that constitutional amendments still require Senate approval. "The Takaichi Trade" 2.0 To be frank, the market landscape was already set before the election, and the vote only determined the intensity of the impact. After the announcement of the early election, both the Nikkei 225 and the TOPIX index hit historic highs; the yen against the US dollar briefly fell below the 159 level, and long-term Japanese government bond yields rose to multi-year highs. As of 2026, the TOPIX index has risen by more than 8%, with the core logic being that the market is betting on "fiscally expansionist Sanae Takaichi" driving economic growth and corporate profits. There is a general expectation that the strong Takaichi administration will implement more expansionary fiscal policies (larger-scale stimulus, more investment), driving nominal economic growth and ultimately supporting business profits. Therefore, the core strategy of the "Takaichi Trade" is to buy Japanese stocks, short the yen when it rebounds, and be extremely cautious in allocating long-term Japanese bonds (seen as the asset with the highest fiscal risk). In terms of exchange rates, the USD/JPY is currently fluctuating around 155, close to the 160 level at which the Japanese Ministry of Finance has intervened in the past. While the overwhelming victory of the Liberal Democratic Party has eliminated political risks, ironically, this has opened the door for the yen to continue weakening - the market is confident that Japanese fiscal expenditure, debt size, and Japanese bond yields will rise simultaneously, while the US-Japan interest rate differential still favors the dollar. Signs of a sell-off in the long-term Japanese government bond market have emerged, similar to the sell-off of UK government bonds in 2022. In that year, the British government's fiscal plan lacked credibility and was voted against by the bond market, causing yields to skyrocket. While the situation in Japan is not as severe at the moment, the logic is similar: long-term 30-year and 40-year Japanese bonds have seen significant sell-offs due to investor concerns about the government's plans to lower consumption taxes (involving food and other categories), without a clear deficit recovery plan. Yen Arbitrage Trading It is certain that the yen is no longer just a normal currency. For over a decade, it has been the "cheap fuel" for global investors to finance purchases of dollar-denominated assets. The yen-dollar interest rate differential has led to arbitrage trading: borrowing yen at extremely low costs, exchanging these yen for dollars to buy higher-yielding assets such as US Treasuries, corporate bonds, S&P 500 index (ETFs), high-yield bonds, private credit, etc., to earn the interest rate differential, while hoping the yen does not unexpectedly appreciate significantly. However, the main risk of yen arbitrage is that once the yen appreciates significantly, investors will need to spend more dollars to buy back yen to repay their loans, and the exchange costs can directly consume or even wipe out profits. Therefore, if the yen's movements disrupt the strategy, the only action for investors will be to sell off dollar-denominated assets financed with yen. This is why the situation in Japan must be closely monitored - in times of heightened risk sentiment, it is enough to shake the S&P 500 index. The more stable the Japanese Prime Minister's power and the larger the policy space, the higher the risk for global investors engaging in arbitrage trading, with potential repercussions following suit. Outlook for Three Scenarios Based on the analysis above, SeekingAlpha analyst Agar Capital has outlined the following three scenario assumptions. Scenario One: Mild Reflation (Baseline Expectation) In this scenario, the Japanese Ministry of Finance will implement mild but sustained fiscal stimulus, the Bank of Japan will gradually raise interest rates, and consumption taxes may be lowered. Agar Capital expects the yen to fluctuate in the range of 155-165, Japanese bond yields to be high but manageable, and the Japanese stock market to continue outperforming, supported by nominal growth and corporate governance reform. Scenario Two: Bond Vigilantes 2.0 Following the ruling coalition securing an absolute majority, the Prime Minister implements tax cuts beyond expectations, defense spending rapidly expands without clear hedge measures. The bond market will not easily foot the bill, ultra-long Japanese bonds' risks will be repriced, with yields possibly breaking 4% and term premiums widening. Rating agencies, the US government (concerning imbalances and exchange rates) are likely to use harsher language. Agar Capital states that this is not the baseline scenario, but the worst-case tail risk - low probability, but extremely impactful if it materializes. Scenario Three: Yen Surge & Arbitrage Trading Liquidation In the third scenario, the Bank of Japan and the government gradually pivot to a hawkish stance, increasing the frequency of rate hikes, with even signals from the US Treasury Department. If the market senses a policy shift, the yen may surge by 10%-15% within 2-3 months. Liquidating arbitrage trades is never an orderly retreat, but rather involves selling off the most liquid assets first. This risk will not be confined to Japan but will sweep through globally. In times of high market leverage and rising risk aversion, the S&P 500 tends to sharply decline, while defensive assets and long-duration assets become safe havens - not because they are risk-free, but because investors' primary goal at that moment is self-preservation rather than profit-taking. Agar Capital concludes that the most crucial issue in the current market is: how quickly will the Japanese Ministry of Finance increase fiscal leverage, and when will it trigger the "red line" in the bond market - the red line that ultimately brought down former UK Prime Minister Thatcher, now repeatedly compared in Japan.