Tokyo’s stock market may face significant challenges next week if the ruling coalition, comprised of the Liberal Democratic Party (LDP) and Komeito, fails to maintain its majority in the upcoming general election on Sunday, the Japan Times reports.
Analysts warn that a loss of seats for the coalition could lead to increased political uncertainty, impacting investor confidence already shaken by tightening monetary policies and geopolitical tensions.
Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, stated in a report released Monday that if the ruling parties do not secure a majority, the benchmark Nikkei 225 index is likely to experience a sharp decline. This comes as the LDP confronts difficulties in the election, including a political funds scandal and Prime Minister Shigeru Ishiba’s inconsistent stances on key issues.
Recent polling indicates that the LDP could lose a significant number of seats, with Kyodo News suggesting a potential shortfall, while Asahi Shimbun forecasts that the coalition may win fewer than the 233 seats needed for a simple majority in the 465-member Lower House. Currently, the LDP holds 256 seats and Komeito holds 32.
A narrow majority could still present challenges for effective governance, as it may not provide the mandate required to implement policies decisively. Parliamentary rules state that 261 seats are needed to chair committees and ensure a majority in them, while 244 seats are necessary to equal the opposition’s representation in those committees.
Polls suggest that the Constitutional Democratic Party of Japan (CDP), the largest opposition party, may increase its seat count, and the Democratic Party for the People (DPP) is also expected to gain ground. If the LDP and Komeito narrowly miss a majority, they may seek to form coalitions with some opposition parties, which could complicate economic policy under Ishiba’s leadership.
Takahide Kiuchi, executive economist at Nomura Research Institute, noted that failure to secure a clear majority could hinder the Bank of Japan’s plans for monetary tightening and fiscal reconstruction. He stated that while delays in monetary policy normalization could weaken the yen, potentially benefiting stocks, the overall impact of political turmoil and policy uncertainty would likely outweigh this advantage.
In recent weeks, the yen has fluctuated between the low ¥140 and low ¥150 range against the dollar amid monetary policy uncertainties and growing apprehension about the election’s outcome. Kiuchi emphasized that as long as the ruling coalition maintains a majority, stocks are expected to perform well.
Market analysts predict that any immediate fluctuations in domestic stocks following the election may be temporary. Yutaka Miura, a senior technical analyst at Mizuho Securities, suggested that whether the market reacts positively or negatively, the effects will likely be absorbed by Monday. He added that given the close relationship between Japanese and US stock markets, the Nikkei index’s performance will be influenced more by subsequent US market trends.
While Miura believes it is unlikely that an opposition coalition led by the CDP will gain a majority to control the government, he noted that even if they do, the CDP’s economic policies are not substantially different from those of the LDP, suggesting that long-term impacts on the stock market would be minimal.
Following a record high in early July, Japanese stocks have experienced volatility since the Bank of Japan’s unexpected rate hike on July 31, particularly after the yen fell below the ¥160 mark. Stocks had a steep decline of 12% on August 5 following this rate increase but have since rebounded, though they remain below previous highs.
