Why did Japan's Prime Minister suddenly dissolve the House of Representatives, causing the financial markets to 'tremble'?

On January 23, 2026, Japanese Prime Minister Sanae Takaichi suddenly announced the dissolution of the House of Representatives during a cabinet meeting. This decision hit like a deep-water bomb, causing waves in the Japanese financial market. Government bond yields soared, the yen plummeted, and the stock market fluctuated sharply, with the market expressing its concerns about this political decision in the most direct way. Analysts pointed out that Takaichi’s move aimed to consolidate her power by leveraging her high domestic approval ratings, but the cost of this political gamble might be borne by both the Japanese economy and financial markets.

Sanae Takaichi had been in office for only three months, yet the cabinet's approval rating remained above 70%, a high level. This paradox of “high approval ratings and low public support” exposes the deep contradictions in Japan’s political ecology—the public’s anxiety over a sluggish economy is transformed into expectations for a strong leader. Takaichi’s choice to dissolve the House of Representatives at this time is essentially an attempt to convert the political honeymoon popularity into parliamentary seats, clearing the way for implementing radical policies.

Currently, the ruling coalition holds just 233 seats in the House of Representatives, barely a majority, and is in the minority in the House of Councillors. This structural weakness has caused over sixty conservative bills endorsed by Takaichi to be repeatedly vetoed by the opposition, including key issues such as Taiwan-related statements that strained China-Japan relations and obstacles to increasing the defense budget. By calling an early election, Takaichi hopes to break parliamentary constraints and even achieve a single-party majority for the Liberal Democratic Party, thereby freeing herself from reliance on opposition support.

A more realistic consideration is to avoid the pressure of questioning. January 23 was originally the opening day of the regular National Assembly, and the opposition parties were ready to launch intensive inquiries on issues such as high prices, deteriorating finances, Taiwan-related erroneous remarks, and political scandals, and even submitted a no-confidence motion in the cabinet. Dissolving the House of Representatives can divert public attention from policy failures to electoral games.

The market's response was swift and brutal. After the announcement of the dissolution of the high market, the yield on Japan's 40-year government bonds soared more than 5 basis points to 4%, a record high; The yield on 10-year Treasury bonds rose to 2.330%, reaching a nearly 27-year high. The yen plummeted to 159 yen against the dollar, approaching the psychological mark of 160. Behind this "debt and foreign exchange double killing" is investors' deep doubts about Japan's fiscal sustainability.

The budget for fiscal 2026 proposed by the Takaichi Cabinet is 122.3 trillion yen, of which 31.3 trillion yen is for government bond expenses alone. The balance of Japanese government debt has reached 240% of GDP, far exceeding the international warning line. What is even more alarming in the market is that Takaichi is considering promising in the election that "the food consumption tax will be reduced to zero for two years", a policy that will cost the government 5 trillion yen in revenue every year. If combined with plans to increase defense spending, Japan's financial situation may deteriorate further.

The sell-off in the bond market reflects investors' concerns about a "Japanese-style fiscal crisis." Bloomberg quoted fund industry insiders as saying: "The Japanese bond market is currently in a state of no one buying but selling off. The depreciation of the yen is related to the widening of the interest rate differential between the United States and Japan - the Federal Reserve maintains high interest rate expectations, while the Bank of Japan is constrained by a weak economy and the pace of interest rate hikes has lagged behind, leading to the prevalence of carry trades.

The impact of political changes in Japan has long transcended national borders. China has strengthened export controls on dual-use materials such as rare earth processing and semiconductor materials, directly impacting 70% of Japan's high-end rare earth processing industry chain; Although the United States supports Japan's strengthening of its defense capabilities, it is wary of Takaichi's move to test and revise the "Three Principles of Non-Nuclear Weapons". If the ruling coalition wins an absolute majority, Takaichi may accelerate the constitutional amendment process and even try to delete the "renunciation of the right to war" clause in Article 9 of the Constitution by 2028, which will lead to a continuous rise in Japan's defense budget, squeeze investment in people's livelihood and technology, and exacerbate the risk of fiscal deficits.

Sanae Ichi's "political gamble" is essentially betting on the right-wing line for Japan's future, but history has proven many times that this kind of operation that puts political interests above the economy and people's livelihood often comes at a heavy price. East Asia is at a critical crossroads, and Japan's choices will affect peace and stability in the entire region, and time will test the quality of this gamble.