WeeklyWatch – Investors’ eyes on Japanese elections

3ʳᵈ February 2026

January Round-up

• Markets were bracketed by the US forcing a regime change in Venezuela and growing expectations that President Trump might use force against Iran.

• Many major markets and assets had positive returns, and Asia and Europe outpaced the US in local currency terms.

• The tensions and tariff threats over Greenland faded.

• The new nominee for the position of Fed chair was welcomed by most analysts.

• Gold and silver saw dramatic falls on the final trading day of the month, but both still ended the period in positive territory.

Stock Take

Japanese election fever creates higher bond yields

Hype surrounding Japan’s upcoming election on 8ᵗʰ February may have been overshadowed following speculation about the Fed chair nominee and Trump’s falling out with allies over Greenland, but these election results could have implications for global markets.

Some investors see similarities between the Japanese Prime Minister Sanae Takaichi’s and former UK Prime Minister Liz Truss’ stimulus packages. While Truss advocated for unfunded tax cuts, Takaichi is promoting an extensive stimulus package. If voters approve of Takaichi’s policies, then there is a fear among investors that the Japanese economy could face higher inflationary pressures, which would put more pressure on Japanese bonds and the yen.

With long periods of low interest rates, Japan is one of the world’s largest creditors. The nation’s borrowing relative to its wealth (debt to GDP) is over 200% – more than double that of the UK. The higher inflation could push Japanese bondholders to demand higher yields, as compensation for the extra inflationary risks that come with a large stimulus package on top of increased government borrowing.

As for the yen, if it weakens, traders fear that the Bank of Japan (BoJ) will have to step in to support the currency through the selling of US Treasuries. This has led to speculation regarding a US–Japanese intervention coming into place to support the yen. If the BoJ sell off some of their US Treasury holdings, US bond prices could decrease and push US bond yields higher. As it stands, this intervention hasn’t come into effect.

Favourable Fed for markets

Despite this upcoming pivotal moment in Japan, the US once again stole the headlines. Many commentators felt highly optimistic following the nomination of a new Fed chair, Kevin Warsh, a previous (and the youngest ever) Fed governor. They commended his anti-inflation credentials – at a crucial time as US inflation is closer to 3% than the 2% target.

If confirmed, Warsh will be responsible for overseeing Fed action regarding interest rates after May, when the current chair, Jerome Powell, will finish his tenure. The resulting assumption that near-term rate cuts will be less likely weakened stock markets. The Equity Strategist at St. James’s Place, Carlota Estragues Lopez, said:

“US equity markets reacted negatively to Kevin Warsh’s nomination as the next Fed chair. Investors view his policies as less supportive of interest rate cuts, extrapolating his hawkish attitudes in the past.”

The Chief Economist at St. James’s Place, Hetal Mehta, added:

“We know President Trump wants interest rates to come down, but whichever way Warsh decides is best for interest rates, it’s unlikely he’s going to swing the whole FOMC (the Fed committee which sets interest rates) in his direction near term.”

She also noted:

“There is still quite a process before Warsh gets confirmed. This is probably not going to happen very quickly, given everything else that is going on politically in the US.”

Throughout his second presidential term, Trump has been critical of the Fed. He’s favoured lower interest rates and a weaker dollar, which could result in higher inflation. Assuming that Warsh will be confirmed as the new Fed chair, he could face challenges to the Fed’s independence. As it stands, the White House are seeking to remove one Fed governor, and Powell is under criminal investigation.

Record fall for gold and silver as January ends

The final day of trading in January was a dramatic one for silver and gold. The price of silver fell 31% in dollar terms by market close; during the day, it had been even weaker. This was the metal’s largest intra-day peak-to-trough fall in history. It was a similar case for the gold price, though in a smaller way, falling by 11% to just over $4,700 per troy ounce. This was another record breaker, being the largest one-day fall for the metal since 1980. But for the month overall, the metals rose – gold by 9% and silver by 17% (in dollar terms).

Some analysts suspect that the catalyst for the selling off of gold and silver was linked to the announcement of the new Fed chair, who is expected to prioritise lowering inflation.

It would mean less likelihood of near-term cuts for US interest rates, with continuing dollar weakness becoming less of a certainty. Precious metals have been benefiting from the wide expectation that the dollar will keep weakening – known as the ‘debasement trade’; these gave up ground with investors closing positions and taking profits.

The Fixed Income Strategist at St. James’s Place, Greg Venizelos, noted:

“With Warsh as a credible candidate, the debasement trade has gone into reverse. It was a strong session for the dollar on Friday.”

However, some analysts have highlighted that supports for gold are still in place. These include central bank buying as part of asset diversification, geopolitical uncertainty and higher volatility.

Wealth Check

Will there be more time to pay inheritance tax?

The government have been urged by a House of Lords committee to extend the inheritance tax (IHT) payment deadline on pension assets and for estates containing qualifying agricultural and business property.

The Economic Affairs Committee are proposing to extend the current deadline of six months to one year. It’s hoped that this will give grieving families more time to understand and sort out the significant complexities that come with paying IHT on these assets.

Such complexities include where an individual had many unused pensions, which could be difficult and time-consuming to find, and the increased reliance on professional advisers to sort out these assets, adding costs and risks for executors.

This recommendation arrives as pensions are facing a significant change in tax treatment. From April 2027, the majority of unused funds and death benefits will be included as part of the deceased’s estate and therefore fall under IHT.

Valuations for farmers and business owners may need to cover assets like shops and rental businesses, which makes things even more complicated! Specialist valuation demand will rise, increasing costs and causing more delays.

Late IHT payments are subject to interest charges at the Bank of England’s base rate plus four percentage points. Currently, this would equate to 7.75%.

Top tip:
Poor or no records can increase an IHT bill. HMRC allow certain regular gifts to remain outside of IHT, but only if they’re regular, made from surplus income and don’t reduce your standard of living.
If you’ve made any financial gifts, make a record of them and store it safely. This makes it easier for executors to find and verify exactly what was gifted. You can use form IHT403 to make a log of gifts and transfers you make during your lifetime, and this will then be completed once you pass away.

Lifetime ISA retiring elements

The retirement element of the lifetime ISA (LISA) looks like it will come to an end.

The government are currently creating a replacement LISA, which will only be for first-time buyers, with the 25% bonus paid at the time of property purchase, according to reports.

Under the new bonus structure, exit fees will be removed – a 25% withdrawal penalty under current rules, which applies if the tool is used for purposes other than purchasing a first home or retiring when you turn 60.

LISA rules currently allow individuals to contribute up to £4,000 each tax year and receive a 25% bonus from the government – up to £1,000 annually.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Please note that Lifetime ISAs are not available through St. James’s Place.

In the Picture

Worries concerning Japanese inflationary challenges and government spending plans have pushed up Japanese government bond yields over the last few years. Their debt-to-GDP ratio is already over 200%. Could more expensive borrowing become more of a head scratcher for the nation’s leaders?

If Prime Minister Sanae Takaichi is re-elected after next weekend’s general election, there’s increased investor concern that her proposed stimulus package could have negative results when it comes to inflation pressures. The Japanese equivalent of ‘Trussonomics’?

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SJP Approved 02/02/2026