The competition between the ruling and opposition parties over consumption tax cuts has intensified, raising concerns about fiscal deterioration.

Key Chapter Title List

1. Prime Minister Sanae Takaichi Announces Dissolution of the House of Representatives, Pledges to Implement Consumption Tax Reduction
2. 10-Year Government Bond Yield Reaches 2.3%
3. House of Representatives Seat Composition
4. 30-Year Government Bond Yield Trend
5. Important Statement

Document Introduction

This report focuses on the key dynamics in Japanese politics and financial markets in late January 2026. The core background is Prime Minister Sanae Takaichi's official announcement on January 20 of her plan to dissolve the House of Representatives at the opening of the ordinary Diet session scheduled for January 23. The election schedule is expected to be announced on January 27, with voting on February 8. Although this move has drawn some criticism for potentially creating a political vacuum during the House of Representatives election period, the prevailing view is that the Prime Minister aims to hold the election while cabinet approval ratings are still high, in order to consolidate the government's foundation and secure additional seats sufficient to maintain a slim majority. However, the recent formation of a centrist reform coalition by the Constitutional Democratic Party and Komeito has complicated the political outlook. The Liberal Democratic Party may face a tough battle due to the loss of reliable support from Komeito votes, significantly increasing the difficulty of assessing the political landscape.

In this upcoming election, ruling and opposition parties are competing to include consumption tax reduction in their campaign platforms, intensifying the competition. Prime Minister Takaichi, who advocates for responsible proactive fiscal policy, has proposed a plan to reduce the consumption tax rate on food to zero and maintain it for two years. As these tax reduction proposals have not been preceded by discussions on clear funding sources, market concerns about worsening fiscal conditions continue to rise. Some movements interpreted as "selling Japan" have already appeared in the financial markets. This week, bond market yields, particularly those of ultra-long-term bonds which are more sensitive to fiscal risks, have risen. On January 20, Japan's 10-year government bond yield reached 2.3%.

Currently, although the pace of yield increase is rapid, the Bank of Japan is considered to be in a difficult position to intervene forcefully, as any attempt to suppress rising yields could risk triggering further yen depreciation. In this environment, interest rates are expected to continue facing upward pressure in the short term. So far, the rise in interest rates has been primarily viewed as a benign increase driven by expectations of rate hikes supported by a virtuous wage-price cycle. However, it must be noted that the recent yield increases are increasingly taking on characteristics of a malignant rise driven by concerns over fiscal deterioration. This shift marks a key change in the market's driving logic.

The report provides key background information through chart data: As of November 28, 2025, the House of Representatives seat composition was 233 seats for the ruling coalition (LDP/Japan Innovation Party), while the Constitutional Democratic Party and Komeito coalition held 172 seats, with the majority threshold being 233 seats (total seats: 465). Furthermore, the report references a historical trend chart of the 30-year government bond yield up to January 19, 2026, providing a visual reference for long-term interest rate movements. This analysis is based on internal compiled data and market observations from Daiwa Asset Management, aiming to provide professional investors and policy analysts with timely and rigorous situation assessment.