The Liberal Democratic Party of Japan, led by Prime Minister Sanae Takaichi, secured 316 of the 465 seats in the House of Representatives election held on the 8th. It is an overwhelming victory that surpasses the threshold for proposing constitutional amendments. Markets say there is a growing likelihood that Japan's expansionary fiscal policy, which Takaichi has flagged, will become reality.

◇ Possibility of a weaker yen and weaker Government Bonds in Japan… concerns that Korea could move in tandem

Unlike the previous administration, which emphasized fiscal soundness, Takaichi has stressed expansionary fiscal policy. Immediately after taking office, the government drew up an extra-large supplementary budget, and this year's general account budget was finalized at a record high of about 122.3 trillion yen (about 1,140 trillion won). With the landslide victory in the general election, future fiscal policy appears likely to gain further momentum.

After the dissolution of the House of Representatives in Tokyo on Jan. 23, Sanae Takaichi (third from left), the Japanese prime minister, raises a fist with party lawmakers and shouts "Ganbaro (Let's do our best)." /Courtesy of Reuters Yonhap

Markets see this as a factor for yen weakness and higher Japanese Government Bonds yields (lower bond prices). To fund expansionary fiscal policy, large-scale Government Bonds issuance is inevitable, raising simultaneous concerns about Japan's rising fiscal burden and a deterioration in Government Bonds market supply-demand. Japan's government debt-to-gross domestic product (GDP) ratio is 237%, double that of the United States (120%) and about five times that of Korea (47%).

Some related moves have already appeared around the House of Representatives election. According to Investing.com, the dollar-yen rate broke above 157 yen at 7 a.m., right after the lower house election results were released, the highest level since on the 23rd of last month. The yield on Japan's 10-year Government Bonds, which closed at 2.23% on the 7th, also rose intraday to 2.27%, the highest since Jan. 27.

◇ "If expansionary fiscal policy takes shape, Korea's exchange rate and Government Bonds yields will also be affected"

Analysts say Korea, whose linkages with Japan's financial markets have grown, is also unlikely to avoid the impact. First, the won is likely to weaken in tandem with the yen. Choi Gyu-ho, an economist at Korea Investment & Securities Co., said, "In the past, the correlation between the won and the yen was low, but since 2022, the correlation coefficient has risen to 0.83," adding, "The yen's influence on the won's trajectory will grow going forward."

On the 9th, as the KOSPI opens higher, a digital board at the main dealing room of Hana Bank headquarters in Jung District, Seoul, displays market conditions. /Courtesy of News1

In the medium to long term, long-term Government Bonds yields also look set to rise. If Japanese Government Bonds yields climb, global funds, including those of Japanese institutional investors, could shift from Korean Government Bonds to Japanese Government Bonds. In that case, Korean Government Bonds prices could weaken and yields could rise.

Moon Hong-cheol, a researcher at DB Financial Investment, said, "Depending on what policies Takaichi actually pursues after forming the Cabinet, Korea's financial markets could also be affected," adding, "If the expansionary fiscal blueprint takes concrete shape, volatility in the exchange rate and Government Bonds yields is likely to increase."

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