Stock Market Reacts to Coalition’s Election Loss
Japanese stocks rallied significantly on Monday as the yen dropped to a three-month low following the ruling coalition’s major setback in the parliamentary election. Prime Minister Shigeru Ishiba’s Liberal Democratic Party (LDP), which has largely governed Japan since the post-war era, along with its coalition partner Komeito, secured only 215 seats in the lower house, falling short of the 233 seats required for a majority. Previously, the LDP held 247 seats, while Komeito held 32. The election results have introduced uncertainty in Japan’s political landscape, raising concerns over potential instability and policy direction as power-sharing negotiations loom.
The Nikkei 225 index (.N225) reflected investor sentiment, climbing 1.45% to reach 38,463.50 by midday, following a nearly 2% surge earlier in the session. While the market initially opened 0.4% lower, it quickly turned positive as the weaker yen appeared to provide a boost to Japanese stocks, particularly benefiting exporters. The yen dropped to 153.885 against the dollar, its lowest since July 31, eventually settling around 153.60.
Economic Impact of Weakening Yen and Political Uncertainty
While potentially challenging for Japan’s domestic economic stability, the depreciating yen creates favorable conditions for major exporters by inflating the value of international sales and drawing in foreign investments with cheaper stock prices. Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, acknowledged that the election outcome creates political uncertainty, but noted a sense of relief that the election “risk event” was behind investors. As a result, Japan’s transport equipment sector saw gains, with the Tokyo Stock Exchange’s transport sector index jumping over 3%, led by major brands like Toyota, which rose nearly 4%, and Nissan, climbing 3.3%.
Japanese semiconductor-related stocks also performed well, with Advantest, a chip-testing equipment manufacturer, becoming the largest point contributor on the Nikkei with a 4.7% increase. The uptick mirrors similar gains in the U.S. chip sector, suggesting positive investor sentiment in Japan’s tech and export-heavy industries.
Bond Market Reactions and Potential Economic Policies
The uncertain political climate had ripple effects in Japan’s bond markets, where benchmark 10-year government bond futures dropped 0.11 yen to 143.95 yen, reversing earlier gains. Yields for both five-year and 30-year Japanese government bonds rose slightly, with the 10-year yield increasing by 1.5 basis points to reach 0.96%. Analysts anticipate sustained high yields, as political instability raises concerns around Japan’s fiscal management and may lead to looser government spending.
With opposition parties potentially stepping in as coalition partners, the market is watching for shifts in fiscal policy. Many opposition groups favor low-interest rates and increased government spending, which may support Japanese stocks but could weaken the yen further. Analysts at Morgan Stanley suggested the coalition’s losses reduce the likelihood of policies like a corporate tax rate hike. BNY analysts noted that, with the Bank of Japan’s cautious approach to rate hikes, the dollar could climb further against the yen, potentially reaching 155. Investors are also closely watching the U.S. presidential race, which could influence the dollar and Japan’s economic outlook.
