What Are the Impacts of Sanae Takaichi’s Election Gamble? Will the Yen Rebound or Slump?

TradingKey - The opening drama of 2026 is unfolding even more intensely than Wall Street anticipated. With only a few days left before the Japanese general election on February 8, incumbent Prime Minister Sanae Takaichi is making 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) core base as an "Iron Lady" after succeeding Shigeru Ishiba, whose approval ratings had collapsed, in October 2025. However, the real test is whether she can secure a mandate for long-term governance through this snap election to fully implement her expansionary economic policies with their strong Abe-ist overtones.

Influenced by factors such as the Japanese general election and a surge in government bond yields, recently, the Yen exchange rate volatility has increased significantly. After failing to challenge 160.0, USD/JPY retreated sharply at one point, with the Yen appreciating by nearly 4% over three trading days. However, USD/JPY bottomed out and rebounded on January 28, resuming its climb; the Yen could depreciate further or lose the 160.0 handle.

Will the Yen continue to weaken before the election? Can it stage a major comeback after the polls close? The answer lies in Sanae Takaichi's ballot boxes and Bank of Japan (BoJ) Governor Kazuo Ueda's decision-making table.

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

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

The previous Ishiba Cabinet saw its approval rating drop below 20% due to the mishandling of "slush fund" scandals and internal party divisions. After taking office, Takaichi quickly garnered support from conservatives and independent voters with her tough conservative stance and clear reform slogans.

Regarding the upcoming election, the market generally believes Takaichi has a high probability of winning. The LDP is likely to secure a simple majority on its own, and the ruling coalition with Komeito may even challenge for an "absolute stable majority" of seats.

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

A landslide victory for Takaichi would signal political stability, allowing "Sanaenomics" to proceed at full throttle. This could boost market risk appetite and benefit Japanese equities, though the impact on the Yen exchange rate is more complex.

The Fiscal Accelerator and Exchange Rate Brake of "Sanaenomics"

Sanae Takaichi's economic policy is known as "Neo-Abenomics" or "Sanaenomics," centered on bold fiscal spending and building crisis resilience.

Takaichi is a typical fiscal expansionist. She advocates for massive supplementary budgets for disaster prevention and mitigation, R&D in technology (such as AI and semiconductors), and national defense.

Fiscal expansion typically implies increased government bond issuance and an expanded Yen supply. Without corresponding monetary tightening, this exerts depreciation pressure on the Yen.

However, the current excessive depreciation of the Yen has caused energy and food import prices to soar, severely eroding domestic purchasing power and becoming an invisible threat to the cabinet's approval rating.

After winning the election, Takaichi might tone down her rhetoric favoring depreciation to appease public discontent, or even tacitly allow limited central bank intervention or modest rate hikes. At her core, however, she still needs a weak Yen to bolster the financial reports of Japanese multinational giants and sustain the stock market boom.

"Slip of the Tongue"? Takaichi's Yen Comment Controversy

During the final sprint before the election in late January 2026, a remark by Sanae Takaichi nearly caused a backlash.

In a campaign speech, Takaichi hinted that "Yen depreciation has a positive side for the Japanese economy," which opposition parties quickly seized upon, accusing her of "ignoring the hardships of the people" and being "out of touch with the cost of living."

This episode exposed the vulnerability of the Takaichi Cabinet; she cannot afford a Yen collapse before the election. This means that around the February 8 election, the probability of verbal or even physical intervention by the Ministry of Finance is extremely high if speculative capital aggressively shorts the Yen.

What is Kazuo Ueda's Game Plan?

As of January 2026, the Bank of Japan has maintained its policy rate at 0.75%. Compared to the negative interest rates of several years ago, 0.75% represents significant progress, marking Japan's official exit from the deflationary era.

At a January press conference, Kazuo Ueda stated that while the economy is recovering moderately, it is necessary to monitor the results of the spring wage negotiations (Shunto) and uncertainties in overseas economies, particularly the policies of the Trump administration in the U.S.

Ueda has recently repeatedly emphasized a "virtuous cycle," where wage growth drives price increases. If the 2026 Shunto results show wage hikes outpacing inflation, the BoJ is highly likely to raise interest rates to 1.0% in the second half of the year.

Currently, the yield gap between the U.S. and Japan remains vast. As long as the BoJ maintains its gradual approach at 0.75% and the Fed does not cut rates significantly, the Yen will lack the momentum for any significant appreciation.

The Foundation of the Yen Exchange Rate Lies in Japan's Economic Fundamentals

Data from December 2025 shows that Japan's core CPI is still fluctuating between 2.1% and 3.0%, 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.

Furthermore, while nominal wages are rising, real wage growth adjusted for inflation remains weak. This is an urgent problem for Sanae Takaichi and one reason why the Yen lacks long-term support.

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

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