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US/Japan: Firm US labour data dampens near-term Fed cut expectations; LDP lands landmark election victory. US nonfarm payrolls rebounded to 130k in January, doubling consensus expectations of 65k. The unemployment rate eased for a second month to 4.3% in January, from 4.4% in December and 4.5% in November. The data convinced Cleveland Fed President Beth Hammack that the stabilising labour market did not need additional rate cuts. Kansas Fed President Jeff Schmid wants the Fed to hold rates at a “somewhat restrictive” level because inflation remains above the 2% target. January’s headline and core CPI inflation are expected to converge at 2.5% y/y, down from 2.7% and 2.6% respectively in the previous month. Labour and CPI data are unlikely to alter the market’s belief that Warsh will deliver a rate cut at his first FOMC meeting as Fed Chair in June.
Shifting to Japan, the Liberal Democratic Party (LDP) secured a two-thirds supermajority in the lower house in the 8 Feb election, marking the largest post-war victory for a single party. This decisive outcome gives the government substantial latitude to enact major legislation with minimal resistance.
The Takaichi administration now has a clear mandate to pursue fiscal expansion. Market attention is focused on the proposed food consumption tax cut. Under the base-case scenario, the government is expected to implement the tax cut in 2H26. Reducing the food consumption tax rate to zero is estimated to lower CPI inflation by nearly 2 %pts, boost GDP growth by close to 0.5 %pts, and widen the fiscal deficit by approximately JPY5tn (0.8% of GDP). While earlier implementation at the start of the new fiscal year in April would require rapid legislative drafting, National Diet approval, and administrative system changes, this remains feasible given the LDP’s victory.
Beyond the consumption tax, the government is likely to prioritise passage of the FY26 general budget before the new fiscal year begins, revise long-term fiscal policy guidelines around mid-year, and prepare a FY26 supplementary budget later in the year. The FY26 budgets are expected to be expansionary, with an emphasis on stimulating growth, promoting investment in strategic industries, and supporting households. The revised long-term fiscal guidelines may place less emphasis on achieving an annual primary balance surplus, instead shifting toward a multi-year assessment framework.
With political uncertainty largely resolved, the Bank of Japan (BOJ) is expected to proceed with further policy normalisation. Under the base-case scenario, the BOJ is likely to raise rates by an additional 25 bps to 1.00% in June or July, after comprehensive Shunto wage data become available. The BOJ is expected to look through temporary GDP and CPI distortions from the food consumption tax cut in 2H26, focusing instead on potential growth and underlying inflation dynamics. This approach could open the door to another rate hike in Dec 2026 or early 2027.
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Related insights
- FX Tactical Ideas: US-Iran Ceasefire Flips USD Outlook10 Apr 2026
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- FX Tactical Ideas: US-Iran Ceasefire Flips USD Outlook10 Apr 2026
- Bangkok Dusit Medical Services10 Apr 2026
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