The Japanese yen continued its downward trend, dropping 1% against the dollar, while Japanese stocks experienced gains on Monday. This shift comes as investors assessed the implications of the Liberal Democratic Party (LDP) and its coalition partner’s loss of majority control. The yen fell as low as 153.88 against the dollar, marking its fourth consecutive week of declines. This depreciation has erased all gains made since the Bank of Japan raised interest rates in late July, increasing speculation that authorities may need to intervene in the currency market due to the political uncertainty surrounding future rate policies.
“This result is definitely a concern for many investors, as there is no clear picture of who will lead the country,” said Hebe Chen, a market analyst at IG Markets Ltd. “The LDP finds itself in a challenging position with no straightforward solutions.”
As of 3 p.m. in Tokyo, the yen was trading at approximately 153.66, following comments from Prime Minister Shigeru Ishiba, who expressed a commitment to restoring political stability and indicated he would not resign. The yen has lost 7% against the dollar this month, making it the worst performer among the Group of Ten currencies.
In contrast, the Nikkei 225 Stock Average surged by 1.8%, the largest increase in over three weeks, while the Topix Index rose by 1.5%. Despite the typically negative correlation between political instability and equities, signs that Ishiba may secure enough support to remain in office could be viewed positively. Additionally, a weaker yen often benefits Japan’s stock market.
“The market had already factored in the LDP’s loss of majority, so today’s uptick is largely a reactionary move,” commented Amir Anvarzadeh, a Japan equity strategist at Asymmetric Advisors. “We are witnessing a significant political realignment, and market dynamics are shifting, but this isn’t necessarily a positive or negative development for the market.”
According to public broadcaster, support for the LDP and its coalition partner Komeito fell short of the 233 seats required for a majority in the lower house, with similar results reflected in other media surveys.
In the fixed-income market, the yield on benchmark 10-year government bonds increased by 2.5 basis points to 0.97%. The LDP may seek an alliance with a party advocating for consumption and income tax cuts, which is likely to pursue expansionary fiscal policies, noted Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management Co.
The yen’s weakness can largely be attributed to Japan’s ultra-low interest rates compared to the US and other major economies. Analysts expect the Bank of Japan to maintain its current policy interest rate at its upcoming meeting concluding on Thursday.
While the yen remains far from its recent low of 161.95 set in July, the recent decline prompted Japan’s top foreign exchange official, Atsushi Mimura, to express heightened vigilance regarding currency movements.
Japanese stocks have faced challenges since reaching record highs in July. Gary Dugan, CEO of Global CIO Office, remarked, “Markets would prefer the current coalition to secure a win. International investors seek a stable corporate sector focused on restructuring, free from political distractions.”
However, Nicholas Smith, strategist at CLSA Securities Japan Co., cautioned that Ishiba had initially proposed tax increases. “The weaker the LDP’s position, the more difficult it will be for him to implement such measures, which could benefit the markets,” Smith explained.
Tim Waterer, chief market analyst at KCM Trade based in Sydney, warned of potential legislative gridlock that may negatively impact both the yen and the Nikkei in the short term. “The yen has been under selling pressure throughout October, and a close election outcome is unlikely to favor the Japanese currency,” he concluded.
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