Japan's Takaichi weighs calling a snap election for mid-February

Japanese Prime Minister Takaichi is contemplating a snap election for the House of Representatives around mid-February, aiming to harness her high approval ratings to consolidate her power. Having become the first woman to lead Japan's ruling party, Takaichi now leads an LDP-Ishin minority government after her coalition partner, Komeito, withdrew support due to her hawkish stance. She faces legislative challenges and may be looking for a mandate to strengthen her position. A potential election would see all 465 Lower House seats vacated, necessitating a general election within 40 days. The yen's performance poses a significant challenge as it haunts near a 9-month low and has struggled since mid-2025. The USD/JPY chart reflects this weakness, indicating a record low against the euro and the worst levels against the pound since the 1990s. While a weaker yen boosts export competitiveness, it raises concerns about imported inflation, making the Japanese bond market increasingly vulnerable with long-term borrowing costs surging to the highest in decades. If Takaichi campaigns on increased spending and secures support, it could lead to further selling in Japanese bonds, risking an international crisis. In 2026, Japan poses the most significant risk in the foreign exchange market as the yen's declining value mounts pressure. Japan's massive debts and demographic challenges, compounded by uncertainties regarding the US alliance and China's manufacturing strength, heighten the stakes. While debt crisis warnings have been prevalent for 20 years, Japanese borrowing costs are now at a 30-year high. Such situations can escalate rapidly, potentially leading to broader implications globally.