(Bloomberg) -- Japanese Prime Minister Sanae Takaichi’s reported plan for a snap election fueled a rally in stocks while pushing down bonds and driving the yen deeper into the intervention-risk zone.

Success at the polls for Takaichi, who ascended to the premiership in October, would provide a mandate for her to continue hawkish diplomacy and pro-stimulus policies.

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She plans to announce a dissolution of the lower house of the legislature at the start of the next parliamentary session on Jan. 23, Kyodo News said on Tuesday, following a slew of reports that an election was being considered. The Yomiuri newspaper first reported late Friday that Takaichi may call for a vote on Feb. 8 or Feb. 15, citing unidentified government officials.

Even before the latest Kyodo report, the yen had hit its weakest since July 2024, the month when the Finance Ministry last waded into markets to prop up the currency.

While the picture was bleak on Tuesday for the currency and bonds, stocks extended their gains to record highs, with exporter profits set to gain from a weaker currency and other firms seen likely to benefit from continued expansionary policy if Takaichi’s election gamble pays off. Yields on super-long bonds spiked to record levels on concern that Takaichi’s policies will dent the nation’s finances.

“As the scenario of the LDP securing a single-party majority becomes more realistic, concerns about further fiscal expansion backed by public support are likely to accelerate selling of JGBs and the yen,” said Rinto Maruyama, a currency and rates strategist at SMBC Nikko Securities Inc.

A snap election would likely aim to capitalize on high approval ratings of about 70% for Takaichi and could strengthen the Liberal Democratic Party’s grip on power in the more powerful lower house. The ruling bloc currently has a razor thin majority of 233 seats out of 465.

But a snap vote also comes with risks. While new leaders calling an early election to take advantage of a support bump comes straight from the LDP’s regular playbook, a similar move spectacularly backfired for Takaichi’s predecessor Shigeru Ishiba. An election he called in autumn 2024 resulted in the loss of the ruling coalition’s lower house majority.

For the first time in a quarter century, the LDP would also be fighting an election without a coalition ally that has a track record of turning out supporters across the nation.

“She has made a high-risk choice, banking solely on her high approval ratings,” said Yu Uchiyama, a professor of political science at the University of Tokyo. “It’s almost certain the election will be held. Given all the media coverage so far with information coming out of the LDP itself, not holding it now would erode Takaichi’s credibility.”

Tuesday’s market reaction mirrors the stock buying and bond selling triggered by Takaichi’s appointment as prime minister last year. Her aggressive fiscal spending policies have helped lift Japanese equities to multiple record-highs, while keeping JGBs and the yen under pressure.

Expectations that Takaichi could cement her mandate in an election are reigniting that trade Tuesday, said Masahiko Loo, senior fixed-income strategist at State Street Investment Management.

“The path of least resistance for now is higher Nikkei, weaker yen and JGBs (steeper yield), on a classic backdrop of the ‘Takaichi trade,’” he said.

The Japanese currency slipped as much as 0.5% on Tuesday afternoon despite remarks earlier in the day from Japan’s Finance Minister Satsuki Katayama, who said she had spoken with Treasury Secretary Scott Bessent about the yen’s one-sided moves. This hint at a pre-approval for currency intervention only fleetingly nudged the yen higher, before the overarching theme of the early election continued to drive the market moves.

The Nikkei 225 rose more than 3% and the Topix stock index gained more than 2%, with both extending their record highs. Japan’s 30-year government bond yield surged as much as 12 basis points to 3.52%.

The yen’s weakness risks triggering intervention if it breaks beyond 161 to the dollar, Loo added.

Since becoming prime minister, Takaichi has polled favorably across the board in opinion surveys, at times touching support of about 80%. Despite her personal popularity, she is helming a government with a weakened grip on power and a new coalition member following two election losses that initially stripped the ruling coalition of its majority in both houses of parliament.

Former coalition partner Komeito exited the coalition last October, forcing Takaichi to pivot to other parties in search of support. Komeito provided grass-roots, organizational support during elections for over two decades.

Electoral dynamics

The electoral dynamics of the new coalition with the Japan Innovation Party have yet to be tested. The LDP’s new ally has a strong presence in the area around Osaka but has proved less successful in securing votes beyond that region. And its partnership with the LDP still doesn’t extend to electoral cooperation, adding another layer of uncertainty to the upcoming poll.

Other smaller parties, including the Democratic Party for the People and Sanseito have made large gains in recent elections, muddying the outlook for any upcoming election. Opinion polls suggest that Takaichi has made inroads in drawing back support from those parties. Still, voters may not welcome an early poll.

A February election would most likely delay the passage of the budget for the fiscal year starting April, risking criticism that Takaichi is putting inflation countermeasures on the back-burner as she focuses on securing her grip on power.

Some senior members of the LDP, including kingmaker Taro Aso, are not completely on board with the timing, according to the Mainichi newspaper, raising questions of how much support Takaichi has within her own party.

“Since the Constitutional Democratic Party and Komeito are advancing talks on election cooperation, if that leads to the CDP gaining votes, it would be a major blow to the LDP,” Uchiyama said.

Still, a victory that delivers a majority for the LDP would make it easier for Takaichi to proceed with her expansionary economic policies, while raising further doubts about the nation’s finances, according to Atsushi Takeda, chief economist at Itochu Research Institute.

“Loosening the finances will naturally be a plus for the economy over the short term,” Takeda said, while flagging the risk that additional stimulus will fuel inflationary momentum and add to upward pressure on long-term yields. “If we look a little further into future, there’s the possibility that this will lead to a negative impact on the economy.”

--With assistance from Keiko Ujikane and John Cheng.

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