Japanese Stocks and Yen Expected to Fall

By Brigid Riley and Kevin Buckland

TOKYO (Reuters) – Japanese stocks and the yen are anticipated to decline, while longer-dated domestic government bond yields are expected to rise, following exit polls indicating a potential loss of parliamentary majority for Prime Minister Shigeru Ishiba's coalition in Sunday’s election.

The long-ruling Liberal Democratic Party (LDP) and its junior coalition partner Komeito might need to establish power-sharing agreements with other parties, as suggested by the polls.

Concerns around the LDP losing its standalone majority have left Japan's financial markets uneasy ahead of the election. Opinion surveys have intensified fears, indicating that the coalition could lose its majority entirely.

Samuel Hoang, a portfolio manager for Japan funds at Eastspring Investments in Singapore, remarked, "The political uncertainty from the election outcome may negatively affect investors' sentiment, putting pressure on the markets in the near term."

Should a minority coalition emerge, markets will likely scrutinize the policy positions of opposition parties as potential allies, many of which advocate for low interest rates and could lead to increased government spending.

Shoki Omori, chief Japan desk strategist at Mizuho Securities, stated, "If they want to show good teamwork, they need to spend more. Fiscal policy is going to come first—that's where the focus is going to be, and I think it'll need to be a big one."

Ishiba, who has been in office for just a month, aimed for the coalition to retain the 233 seats necessary for a lower house majority, down from the previous majority of LDP's 247 seats plus Komeito's 32.

Coalition losses could diminish the likelihood of the next government pursuing more challenging initiatives, such as increasing the corporate tax rate, according to analysts at Morgan Stanley.

The political uncertainty contributed to a 2.7% decline in the benchmark Nikkei share average last week, with further selling expected in the near term. Longer-dated Japanese government bond yields have risen, reflecting concerns about a potentially larger fiscal deficit.

The yen, under pressure from rising U.S. Treasury yields, fell to the 152-per-dollar level for the first time in three months last week.

Analysts at BNY forecast the dollar may rise to 155 yen again, especially as the Bank of Japan suggests no immediate need for a rate hike amid increased political instability from the election.

"Dollar-yen is pretty much dependent on U.S. data. I think the yen might be sold off tomorrow, because the election result might be seen as in line with expectations," noted Mizuho's Omori. "There will be relief that the event is done."

Japan’s general election occurs nine days before the U.S. presidential vote count, with investors assessing the potential for a stronger dollar and increased yields in the event of another Donald Trump presidency along with a Republican-led Congress.