On Monday, Japan’s stock market experienced a strong rally as the yen fell to a three-month low following a surprising setback for Prime Minister Shigeru Ishiba’s ruling coalition in the weekend’s parliamentary election.
The Liberal Democratic Party (LDP), which has held power for nearly all of Japan’s post-war period, along with coalition partner Komeito, lost their majority in the lower house, raising questions about Japan’s future policy direction and creating potential political instability.
The Nikkei 225 Index gained 1.82% to reach 38,605.53, despite initial dips early in the trading day. The yen continued its downward trend, falling as low as 153.885 per dollar, a level not seen since late July, before stabilizing around 153.505 by midday trading. This weakened yen bolstered Japanese exporters by inflating the value of overseas earnings, while also making Japanese equities more affordable for international investors.
In the wake of Sunday’s election, which saw the LDP and Komeito reduced to 215 seats—below the 233-seat majority threshold—the market response has been twofold. While analysts noted that the election outcome added uncertainty, they observed a sense of relief that the event was behind the market.
“The result of the election itself is a negative for the stock market, without a doubt, because of the rise in political uncertainty. However, the rally is partly on the fact that this big risk event is now behind us, so there’s a sense of relief. That and the weaker yen,” stated Masahiro Ichikawa, chief strategist at Sumitomo Mitsui DS Asset Management.
Transportation and chip-manufacturing stocks were among the top performers. In the transport sector, Toyota and Nissan both experienced significant gains, rising 4% and 3.5%, respectively. Meanwhile, Advantest, a chip-testing equipment maker, saw its stock rise by 4.6% as it tracked gains seen among U.S. semiconductor firms.
However, market experts like Norihiro Yamaguchi from Oxford Economics remain cautious.
“I don’t expect the rally will continue,” Yamaguchi said.
Yamaguchi noted that investors will likely remain cautious until the political situation clarifies. He also predicted that bond yields would stay elevated as investors worry about potentially looser fiscal policies from any future coalition agreements.
In the bond market, Japanese government bond yields showed varied reactions, with the 10-year yield rising by 2.5 basis points to 0.97%. The 30-year yield also climbed 5 basis points to 2.22%. Higher yields are often a sign of investor concerns regarding fiscal policy, especially with the prospect of reduced government stability. Analysts at Morgan Stanley suggested that the new political landscape might reduce the likelihood of potentially contentious policies, such as corporate tax hikes, coming into effect.
The election result also directed attention toward potential shifts in fiscal policy, particularly if opposition parties join a coalition. Many of these parties support lower interest rates, a stance that could keep the yen weak in the foreseeable future. The yen’s decline could see the dollar trading as high as 155 yen if the Bank of Japan downplays any immediate need to adjust rates, analysts at BNY reported.
Looking ahead, the BOJ will review its monetary policy later this week, with no major changes anticipated. Meanwhile, global investors are also focused on the upcoming US election, which could influence the US dollar’s strength and set new directions in global finance.
Reuters and the Wall Street Journal contributed to this report.
