Japan’s Prime Minister Sanae Takaichi on Monday called a snap general election for February 8, seeking a fresh mandate for a sweeping agenda that combines higher public spending, targeted tax cuts, and a faster military build-up amid rising regional security tensions.

Takaichi said she would dissolve parliament on Friday, triggering a nationwide vote for all 465 seats in the powerful lower house. The election will be her first major political test since becoming Japan’s first female prime minister in October and is widely seen as an attempt to capitalize on strong early approval ratings before economic and fiscal risks deepen.

“I am staking my own political future as prime minister on this election,” Takaichi told reporters. “I want the public to judge directly whether they will entrust me with the management of the nation.”

At the heart of her campaign is a pledge to suspend the 8% consumption tax on food for two years, a move aimed at easing pressure on households battered by rising prices. The government estimates the tax freeze would cut annual revenue by about 5 trillion yen ($32 billion), a fiscal cost that immediately rattled markets. Yields on Japan’s 10-year government bonds rose to a 27-year high earlier on Monday, underscoring investor concern about looser fiscal policy at a time when Japan already carries the highest public debt burden among advanced economies.

Takaichi argues the revenue loss would be offset over time by stronger economic activity. Her administration says the combination of tax relief and increased spending would stimulate consumption, create jobs, and ultimately broaden the tax base. Critics, however, warn that the policy risks adding to Japan’s already stretched public finances just as interest rates begin to normalize after decades of ultra-loose monetary policy.

The election comes against the backdrop of a cost-of-living squeeze that has emerged as the dominant voter concern. In a poll released last week by public broadcaster NHK, 45% of respondents cited rising prices as their top worry, well ahead of diplomacy and national security at 16%. That dynamic gives urgency to Takaichi’s tax pledge but also raises the political stakes if voters doubt the government’s ability to manage inflation and debt simultaneously.

Beyond domestic economics, the vote will also serve as a referendum on a profound shift in Japan’s security posture. Takaichi’s government plans to unveil a new national security strategy this year, following its decision to accelerate a military build-up that will raise defense spending to 2% of GDP. That level, which aligns Japan with NATO benchmarks, marks a historic departure from decades in which defense outlays were informally capped at around 1% of GDP.

While Takaichi has not committed to spending beyond the 2% threshold, pressures are mounting. Tensions with China over Taiwan and disputed islands in the East China Sea have intensified, and Washington has been urging allies to shoulder more of the regional security burden. Takaichi cited both military and economic coercion by Beijing as justification for her tougher stance.

“China has conducted military exercises around Taiwan, and economic coercion is increasingly being used through control of key supply-chain materials,” she said. “The international security environment is becoming more severe.”

Those concerns were reinforced last week when China banned exports to Japan’s military of items with both civilian and defense applications, including some critical minerals. The move has heightened fears in Tokyo about supply-chain vulnerability and has strengthened the political case for greater defense self-reliance.

Politically, calling an early election allows Takaichi to try to consolidate her authority within the ruling Liberal Democratic Party and stabilize a coalition that holds only a slim majority. The LDP and its ally Ishin currently control a combined 233 seats in the lower house, just above the threshold needed to govern. Takaichi said her immediate goal was to retain that majority.

Her main challenge will come from the newly formed Centrist Reform Alliance, which brings together the Constitutional Democratic Party of Japan and Komeito. Komeito’s decision to end its 26-year alliance with the LDP following Takaichi’s rise has reshaped the opposition landscape. Together, the parties in the new bloc hold 172 seats and are expected to campaign aggressively on cost-of-living issues.

The alliance has already floated an alternative proposal to permanently abolish the 8% sales tax on food, a policy that could resonate with voters but would carry even greater fiscal implications. The contest is therefore likely to hinge not just on whether voters want tax relief, but on which party they trust to manage the long-term consequences.

Analysts say the timing reflects Takaichi’s calculation that her political capital may be at its peak.

“Now may be the best chance she has at taking advantage of this extraordinary popularity,” said Jeffrey Hall, a lecturer in Japanese studies at Kanda University of International Studies.

However, he cautioned that a unified opposition and growing concern about public debt could make the outcome less predictable than headline polling suggests.

With markets already reacting nervously and voters focused on living costs, the February 8 election is shaping up as a pivotal moment. A strong result would give Takaichi a clear mandate to push through fiscal stimulus and a more assertive security strategy. A weaker showing, by contrast, could constrain her agenda and expose the limits of public support for Japan’s most significant policy shifts in decades.

European stocks fell sharply on Monday as investors assessed the economic and financial fallout from U.S. President Donald Trump’s threat to impose escalating tariffs on several European countries if they oppose Washington’s bid to acquire Greenland.

The sell-off reflected growing concern that geopolitically driven trade measures could translate into real damage for some of Europe’s most globally exposed industries, particularly automobiles, luxury goods, and advanced manufacturing.

By late morning in London, the pan-European Stoxx 600 index was down about 1.4%, with losses broad-based across sectors. Only telecoms managed to stay in positive territory, while cyclicals and export-heavy industries bore the brunt of the decline. The move came after Trump said goods from Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland would face tariffs starting at 10% from February 1, rising to 25% from June 1 unless a deal is reached allowing the United States to “buy” Greenland, a semi-autonomous territory of Denmark.

The market reaction underscored how sensitive investors remain to trade policy shocks, especially when they involve the transatlantic relationship, one of the most deeply integrated trade corridors in the world. The European Union and the United States together account for roughly €1.6 trillion in annual trade in goods and services, with Europe running a sizeable surplus in manufactured products. That surplus, particularly in vehicles, machinery, and luxury goods, is now at the center of investor anxiety.

Automakers were among the hardest hit. The Stoxx Europe Automobiles and Parts index fell close to 3%, with shares in Volkswagen, BMW, and Mercedes-Benz down between about 3% and 5%. Porsche and Ferrari also slid, with Ferrari touching a 52-week low. The sharp reaction reflects how exposed Europe’s car industry is to the U.S. market.

The United States is the second-largest destination for EU vehicle exports after the United Kingdom, accounting for roughly 22% of EU car exports by value. In 2024 alone, the EU exported about 750,000 vehicles to the U.S., worth approximately €38.5 billion.

A tariff of 25% on finished vehicles would represent a substantial shock to that trade. For manufacturers, it would either force price increases in the U.S. market, risking a loss of market share, or require companies to absorb the cost through lower margins.

Either route implies weaker profitability. Industry analysts estimate that such a tariff could shave several percentage points off operating margins for premium European carmakers that rely heavily on U.S. sales, particularly in higher-end internal combustion and electric vehicles.

Electric and hybrid models are especially vulnerable, as the U.S. accounts for about a quarter of EU exports in that segment.

The implications extend well beyond final assemblers. Europe’s automotive supply chain is highly integrated, with major suppliers such as Bosch, Continental, and ZF shipping components across borders before final assembly. If U.S.-bound production slows or becomes less competitive, suppliers could face volume declines, pricing pressure, or costly efforts to redirect output to other markets where demand and margins may be weaker. Over time, sustained tariffs could also accelerate decisions to localize more production in North America, eroding Europe’s manufacturing base.

Luxury goods stocks also came under heavy pressure, with the Stoxx Europe Luxury 10 index down about 3%. Shares of LVMH, Hermes, Kering, and Moncler all fell sharply. The U.S. is a crucial market for European luxury groups, not just in terms of volume but also profitability, as American consumers typically deliver high margins.

Tariffs that raise retail prices risk dampening demand, particularly for discretionary purchases, and could force brands to choose between protecting volumes or preserving margins. Even modest volume declines can have an outsized impact on earnings in a sector that has already been grappling with slowing growth after the post-pandemic boom.

Technology and industrial names were not spared. ASML, the world’s largest supplier of advanced chipmaking equipment, fell more than 3%, while ASM International also slipped despite reporting stronger-than-expected preliminary bookings.

Although semiconductors are not directly targeted by the Greenland-linked tariffs, investors appear wary of broader trade and geopolitical spillovers that could eventually touch sensitive technology supply chains. The sell-off in these stocks also reflected profit-taking after recent highs, amplified by a deteriorating risk backdrop.

However, in contrast, defense stocks moved higher. Shares of Rheinmetall, Renk, and Thales all rose as investors rotated into companies seen as beneficiaries of rising geopolitical tensions and higher defense spending. The divergence highlighted a familiar pattern in times of geopolitical stress: capital flows out of trade-exposed cyclicals and into sectors linked to security and state spending.

Beyond individual sectors, the tariff threat raises broader questions about trade flows and investment decisions. Europe’s export model, particularly in manufacturing, has long depended on open access to the U.S. market. A sustained tariff regime would not only reduce export volumes but could also distort global trade patterns, pushing European firms to seek alternative markets in Asia, the Middle East, or Latin America, often at lower margins. Over time, such shifts could weigh on productivity and investment.

There are already signs that policy uncertainty is influencing corporate behavior. Recent data show that European, particularly German, investment flows into the U.S. have slowed markedly, with companies citing unpredictability around trade and industrial policy. While some firms may eventually choose to expand U.S. production to avoid tariffs, such decisions are capital-intensive and take years to materialize, leaving a near-term earnings gap.

The political response in Europe is still taking shape. European leaders have described the proposed tariffs as unacceptable and have pledged to stand behind Denmark. Brussels has tools at its disposal, including the EU’s Anti-Coercion Instrument, which allows for retaliatory measures against economic pressure from third countries. Any move towards retaliation, however, would raise the risk of a broader trade confrontation, with knock-on effects for growth, inflation, and financial markets on both sides of the Atlantic.

For now, markets are left to price a wide range of scenarios. A negotiated de-escalation could limit the damage, although the period of uncertainty alone is likely to weigh on confidence and investment. A full implementation of the tariffs, especially at the 25% level, would have measurable effects on export volumes, corporate profits, and supply chains, with the automotive and luxury sectors facing the most immediate pressure. A prolonged standoff could ultimately reshape transatlantic trade relationships, encouraging structural shifts in production and investment that would be difficult to reverse.

The sharp fall in European stocks on Monday was therefore less about a single policy announcement and more about the recognition that geopolitically motivated trade measures, even if initially narrow, carry the potential to inflict lasting economic and financial damage. Markets will be watching closely for signals from Washington and Brussels in the coming weeks, aware that the path chosen could redefine one of the world’s most important economic relationships.