Japanese Economy: Historic Landslide Victory for the Liberal Democratic Party

■ In the House of Representatives election held on the 8th, the Liberal Democratic Party (LDP) won more than two-thirds of the seats required by the House of Representatives, achieving an overwhelming victory.  

■ The focus now shifts to discussions on food tax cuts and the introduction of a tax credit system with accompanying benefits; whether these policies can gain market acceptance will be crucial. 
 
In the House of Representatives election held on the 8th, the LDP achieved a historic, overwhelming victory. Prime Minister Takaichi's high approval rating made a significant contribution to the increase in seats, with the LDP winning 316 seats, exceeding the required two-thirds (310 seats) of the House of Representatives, far exceeding pre-election predictions. The ruling coalition, including the Japan Restoration Party, won a total of 352 seats. This result even surpasses the 300 seats won during the Nakasone administration in 1986, making it a historic victory. On the other hand, the Middle Way Reform Coalition, the largest opposition party, suffered a crushing defeat, with its seats reduced to one-third of what they were before the announcement. The results of this House of Representatives election show that the government has significantly increased its freedom in policy implementation. The LDP can now hold a second vote in the House of Representatives on bills rejected by the House of Councilors and pass them. The Special National Debt Law, previously feared to become a factor restricting deficit-financed debt issuance after 2026, can be re-passed by the House of Representatives even if rejected by the Senate. Furthermore, initiating a constitutional amendment motion in the House of Representatives has become possible. The policy operational difficulties faced by the minority ruling party, resulting from consecutive defeats in the 2024 House of Representatives election and the 2025 Senate election, are expected to be significantly alleviated. 

 
Future focus will be on discussions regarding consumption tax cuts. In particular, whether the government's proactive fiscal policy can gain market trust will be a major issue. In a post-election interview, the Prime Minister stated that a cross-party National Assembly would be established to discuss a two-year food consumption tax exemption and the introduction of a tax credit system with accompanying benefits. Although the Prime Minister considered consumption tax cuts a "long-cherished wish" during the campaign, there is considerable opposition within the Liberal Democratic Party (LDP). Future discussions will proceed in the National Assembly, but given the LDP's landslide victory, the possibility of discussions being shelved due to opposition from the opposition parties is unlikely, and the likelihood of realizing consumption tax cuts is considered to have increased. However, Liberal Democratic Party Secretary-General Suzuki stated on the 8th that the consumption tax reduction was positioned as a "temporary measure before the establishment of a tax credit system with accompanying benefits," and emphasized that the two years would be strictly adhered to. The so-called "tax credit system with accompanying benefits" is a system that combines a portion of income tax deducted and returned to households with cash subsidies for low-income earners whose tax payments are insufficient. Although infrastructure construction takes time, unlike the consumption tax reduction, which is only a short-term measure against rising prices, this system can flexibly respond to price fluctuations and provide more efficient support to households. There are still high hopes for accelerating fundamental reforms of the tax system and social security. 

 
Regarding the Bank of Japan's interest rate hike, some tension remains between the central bank and the Takaichi government, which favors an active fiscal policy. The "main opinions" released at the Bank of Japan's monetary policy meeting held from January 29th to 30th showed that the central bank is increasingly wary of pressures such as rising prices, yen depreciation, and rising long-term interest rates. If market movements intensify, such as a continued weakening of the yen, it may prompt further dialogue between the government and the Bank of Japan regarding interest rate hikes.