The Japanese yen experienced a 1% decline on Monday, continuing its downward trend, while Japanese stocks saw an uptick. This market reaction came as investors evaluated the implications of the Liberal Democratic Party (LDP) and its coalition partner failing to secure a majority. The yen dropped to 153.88 against the US dollar, marking its fifth consecutive weekly decline and increasing the likelihood that government authorities might intervene to stabilize the currency. Traders are also reassessing expectations regarding the Bank of Japan’s potential interest rate hikes amid the prevailing political uncertainty.
Hebe Chen, a market analyst at IG Markets Ltd., expressed concerns about the political landscape, stating, “This result is definitely a concern for many investors, as it leaves us without a clear picture of who will be leading the country. The LDP finds itself in a precarious position with no easy options available.”
In October alone, the yen has depreciated by 7% against the dollar, making it the weakest performer among its Group-of-10 counterparts.
Despite initial dips, the tech-centric Nikkei 225 Stock Average and the broader Topix index rebounded to gains exceeding 1%. Generally, political instability is considered detrimental to equity markets; however, there remains a chance that Prime Minister Shigeru Ishiba can rally sufficient support to maintain his position. Additionally, currency depreciation typically benefits stock valuations.
“This reaction is unexpected,” noted Shuji Hosoi, a senior strategist at Daiwa Securities Co. “While political risks may be rising, there is still an expectation that the Ishiba administration won’t be rendered ineffective immediately.”
According to public broadcaster NHK, the combined support for the LDP and its partner Komeito fell short of the 233 seats required for a lower house majority, a sentiment echoed by other media surveys.
In the bond market, the yield on the benchmark 10-year government bond increased by 1.5 basis points, reaching 0.96%. Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management Co., indicated that the LDP might form an alliance with a party advocating for tax cuts and expansionary fiscal policies.
The yen’s decline can be largely attributed to Japan’s ultra-low interest rates compared to the US and other major economies. This disparity is expected to persist, as the Bank of Japan is widely anticipated to maintain its current policy rate during its upcoming meeting concluding on Thursday.
Although the yen has not yet reached its July low of 161.95, its recent decline prompted Atsushi Mimura, Japan’s chief FX official, to express increased vigilance regarding currency fluctuations. At 11:48 a.m. in Tokyo, the yen was trading at 153.61 against the dollar.
Japanese equities have faced challenges since achieving record highs in July. Gary Dugan, CEO of Global CIO Office, remarked, “Markets would prefer the current coalition to secure a victory. International investors are looking for a stable corporate sector that can continue restructuring without political disruptions.”
Nicholas Smith, a strategist at CLSA Securities Japan Co., cautioned that Ishiba had previously advocated for higher taxes, and a weakened LDP might hinder that agenda, which could be favorable for market stability.
Tim Waterer, chief market analyst at KCM Trade in Sydney, warned of potential legislative gridlock that may adversely affect both the yen and the Nikkei in the short term. “The yen has faced selling pressure throughout October, and a tightly contested election outcome is unlikely to provide any relief for the Japanese currency,” he stated.
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