TOKYO, Feb 8 (Reuters) - Japan's volatile financial

markets must now contend with Prime Minister Sanae Takaichi

firmly in the driver's seat after her decisive victory on

Sunday, which hands her an electoral mandate to reflate the

economy.

The question for investors is whether Takaichi's electoral

momentum will prompt her to expand her stimulus ambitions or if

it lends her the political leeway to proceed more cautiously.

Since she began her rise to become the nation's first female

premier in ‌October, the "Takaichi trade" has pushed domestic

shares to record highs while causing a precipitous selloff in

Japanese government bonds and the yen.

Voters braved heavy snowfalls in Tokyo and other parts of

Japan ​to deliver what exit polls indicated to be the most

decisive win for Takaichi's Liberal Democratic Party since 1996.

"The stock market ‍is a true believer in Takaichi, so the big

win is going to be good news ⁠for equities when the markets ⁠open

on Monday," said Chris Scicluna, the head of research at Daiwa

Capital Markets Europe.

Takaichi, a devotee of the "Abenomics" stimulus policies of

the late premier Shinzo Abe, has pledged a ‌proactive fiscal

policy funded largely through bond issuance.

She came to office at a ​low point in power and popularity

for her Liberal Democratic Party, which has ruled Japan for most

of the post-World War Two period, forcing her to bargain with

opposition parties with even more liberal fiscal platforms.

"The administration's ⁠foundation will become much more

stable, making it easier for expectations ‍to build around

advancing ​economic policy," said Kota Suzuki, a strategist at

Nomura Asset Management. "Because there will no longer be a need

to actively seek the opposition's cooperation, there will be

less pressure for giveaway-style fiscal expansion."

With polls already indicating a decisive LDP win, Japan's

benchmark ‍Nikkei 225 Index set an all-time high of

54,782.83 on Tuesday. Big winners of late include sectors like

defence, artificial intelligence and chips that have been

singled out by Takaichi for targeted investment.

But prospects for more government outlays have unsettled

investors already concerned about Japan's debt burden, the

largest in the developed world. Those worries came to a head on

January 20, when rates across the JGB yield curve shot to

multi-decade or even record highs after Takaichi called for the

snap election and embraced suspending the sales tax on food.

The yen ​has also ‍been punished, losing about 6% against the

dollar since Takaichi's selection as prime minister in October

and plumbing record lows against the euro and Swiss franc. Only

threats of joint currency market intervention with the United

States have arrested the yen's ​slide.

The size of Takaichi's victory means "the Takaichi trade

will revive, which means JGB yields will be under upward

pressure," said Naoya Hasegawa, the chief bond strategist at

Okasan Securities. "The move of the yen, stocks and bond yields

will affect each other. If the yen falls rapidly, yields will

tend to rise."

While JGB yields remain elevated, some measure of calm has

returned to the market in the past couple of weeks, as

confidence grew that an emboldened Takaichi would keep her

pledge of "responsible" stimulus. The past four debt auctions

have seen resilient demand, and 30-year JGB yields have fallen

31.5 basis points since their record high ​of 3.88% on January

20.

"We assume Takaichi will continue to strike a delicate

balance between proactive fiscal policy and fiscal discipline,"

said Shigeto Nagai of Oxford Economics in Tokyo.

"Although we think she's determined to make the best use of

the fiscal space generated by inflation-boosted tax revenue, we

also believe she seriously worries about a further rise in ‍JGB

yields," he added.