Japan has entered a period of political uncertainty following an election result that stripped prime minister Shigeru Ishiba’s coalition of its majority.
The Liberal Democratic Party (LDP) and junior partner Komeito will have to find a third coalition partner over the coming days.
“The only option for the existing coalition is to join forces with other opposition parties but so far there is nothing visible: that could change,” says James Salter, founder and CIO at Zennor Asset Management. “This brings, sadly, uncertainty and political paralysis.
“This is a negative for the market short term. The yen could weaken further and reignite the whole ‘carry trade’ concerns of August. If we approach Y160/$1 the Ministry of Finance will be forced to intervene, and the Bank of Japan forced into tightening.
“The real risk to global markets lies with the yen. The correlation between surging technology shares and the weakness of the yen has been almost 100%. A Trump victory will unleash animal spirits. Next year we may have the perfect excuse for a genuine bear market correction in global markets. Blame Ishiba.”
Asset Management One economist Yuko Iizuka agrees that the uncertainty will be a short-term negative factor for Japanese stocks.
However, she says it could end up boosting fiscal spending – depending on the outcome of coalition talks.
“We believe that the loss of political stability following the results of this election will be a negative factor for Japanese stocks. In particular, if coalition negotiations centred on the LDP and Komeito end in failure and the LDP is forced to step down from power, the market could become turbulent.
“However, if a coalition with the Democratic Party for the People or Japan Restoration Party is formed or cooperation from outside the cabinet is achieved, fiscal spending is likely to expand ahead of the House of Councillors election in the summer of 2025. Expectations for large-scale fiscal spending are expected to support the stock market.”
The LDP’s election pledges included promoting domestic investment in green and digital transformation, doubling subsidies for regional revitalisation, and accelerating the increase in the minimum wage as part of measures to combat high prices through energy subsidies.
Iizuka says that promoting domestic investment is expected to boost the prices of related stocks.
“On the other hand, the Democratic Party for the People and the Japan Restoration Party have proposed lowering the consumption tax rate as a measure to combat high prices, as well as lowering income tax, raising deduction amounts, and making education-related expenses free of charge.”
“Changing the tax system is not easy, and it is likely that only subsidies to households will be considered for the time being.”
“The Bank of Japan’s monetary policy depends on the economic and price situation, and if things go as expected, the BoJ’s policy stance of raising interest rates is likely to remain unchanged. Therefore, the impact on domestic interest rates is likely to be limited. However, if the market environment, including the stock and foreign exchange markets, becomes unstable, the BoJ is likely to make a cautious decision on raising interest rates.”
However, Chikara Investments portfolio manager Richard Aston says the election result should not have lasting meaningful consequences for Japanese equities.
“The ongoing corporate reforms, focus on return on equity and shareholder return are more important than any minor short-term adjustments to the political agenda.
“From an economic standpoint, the shift from deflation to inflation and its consequences – both positive and negative – are key to Japan’s outlook. In our opinion, there seems to be little disagreement between the political parties on this point and they even share a common goal of normalising monetary policy. If anything, this result may reduce the risk of higher taxes for the foreseeable future, which is a minor positive.
“Investors would do well to cut through the noise and focus on the prospect of consistently and significantly increasing shareholder returns in Japan.”
Stockmarkets rallied while the yen weakened in the wake of the result, with the Nikkei 225 and TOPIX up 1.82% and 1.5% on Monday respectively.
This article first appeared in our sister publication, Portfolio Adviser.
