Analysis of Reports on Prime Minister Takashi's Consideration to Dissolve the General Election and Its Impact on the Japanese Stock Market

Key Chapter Title List

1. Reports that Prime Minister Takaichi is considering a snap general election
2. Increased likelihood of upside risks materializing in the Japanese stock market
3. A positive development if the government's foundation can be strengthened
4. Composition of the House of Representatives
5. High cabinet approval rating and stagnant LDP support rate
6. Tendency for stock prices to rise after the dissolution date in House of Representatives elections
7. Post-election stock performance strongly correlates with seats won by LDP and coalition parties

Document Introduction

This report focuses on the developments reported in early January 2026 regarding Prime Minister Takaichi's consideration of dissolving the House of Representatives for a snap general election, analyzing the potential impact of this political uncertainty on the Japanese stock market. The background of the report includes the possibility of dissolution, which has been pointed out since the inception of the administration against the backdrop of high cabinet approval ratings, and the emergence of a "surprise" early dissolution schedule, sooner than the spring or June period after the enactment of the FY2026 budget initially anticipated by the market. The core of the analysis lies in verifying whether this political process is strengthening its character as an upside risk for the market.

The report first presents the reported likely election schedules (official announcement on January 27, voting/counting on February 8, or official announcement on February 3, voting/counting on the 15th) and shows the current political landscape based on data. Specifically, it points out the instability of the government's foundation: while the LDP and its coalition parties barely maintain a majority (233 seats/ total 465) in the House of Representatives, they are a minority ruling party in the House of Councillors. In this context, the report presents the view that if the ruling parties significantly increase their seat share through a snap election and strengthen the government's foundation, it could raise market expectations for the policy execution of the Takaichi administration and become a "positive development" for the Japanese stock market.

As a methodological approach, this report adopts an empirical approach based on historical data. Analyzing the stock price performance during past House of Representatives elections in a time series, it points out the existence of an anomaly (market anomaly) that "stock prices tend to rise after the dissolution date." Furthermore, through detailed correlation analysis, it demonstrates with data tables that post-election TOPIX stock returns (+10 days, +20 days, +30 days, +60 days) have a "strong correlation" with the seat share won by the LDP and its coalition parties. For example, citing cases such as the 2012 election (ruling parties' seat share 68%) recording a 31% return in the subsequent 60 days, while the 2021 election (63%) saw -6%, it explains the impact of seat gains/losses on market psychology.

However, the report is not solely optimistic and also mentions important risk and uncertainty factors. First, it is currently at the "consideration of dissolution" stage, and actual execution is uncertain. Second, as public opinion poll data shows, there is a discrepancy between the "high cabinet approval rating" and the "stagnant LDP support rate." Therefore, it assesses that even if a snap election is held, whether the LDP can significantly increase its seats is "uncertain." Third, it points out that as long as the situation of not securing a majority in the House of Councillors continues, policy implementation will still require opposition cooperation, presenting a realistic view that not all political constraints will be resolved solely by the House of Representatives election.

Ultimately, the report concludes that the increased possibility of an early dissolution has heightened the likelihood of the upside risk scenario for the Japanese stock market, which we have previously pointed out, materializing. However, its realization and positive impact on the market are conditional upon the election resulting in a significant seat expansion for the ruling parties. Investors need to closely monitor future political developments, keeping in mind the dual uncertainties of whether the election will be held and the number of seats the ruling parties will win.