Japanese Stocks Rally Amid Political Uncertainty

Japanese stocks experienced a rally, while the yen weakened following the ruling coalition's loss of parliamentary majority in a recent election. UBS highlighted the potential for increased near-term volatility in local markets.

Short-Term Yen Movements

According to UBS, short-term movements in the yen are still unpredictable, and clearer direction will emerge as local political uncertainty is resolved. The firm also pointed out that the U.S. presidential elections introduce another layer of uncertainty for investors.

Political Landscape

Japan is now in a 30-day period during which the ruling Liberal Democratic Party (LDP) and its opposition will work to form a new government. UBS anticipates that political uncertainty and volatility will continue, advising an increase in exposure to domestic sectors to help counteract yen volatility.

Medium-Term Outlook

UBS maintains a positive medium-term outlook for local markets due to ongoing corporate governance reforms and increased private consumption. However, they also noted that the Bank of Japan (BOJ) is likely to raise interest rates later this year, though longer-term hikes may face political challenges. Both the LDP and opposition have expressed dissent against rate hikes in the near future.

Monetary Policy Expectations

The BOJ is concluding a two-day meeting on Thursday, and it is widely expected to maintain steady rates. UBS forecasts a 25 basis point interest rate increase in December, bringing benchmark short-term rates to 0.5% after two previous hikes this year.

Investment Recommendations

"We anticipate increased near-term cross-asset volatility until a new Japanese government is established and the U.S. election is finalized. In the meantime, we advise investors against pursuing a higher USDJPY. Regarding Japanese equities, we suggest a neutral allocation of around 5% in diversified portfolios," UBS analysts stated in a note.

Market Performance

Japan’s Nikkei 225 and TOPIX indexes saw significant gains this week following election results indicating potential for increased fiscal support and continued loose monetary policy amid a fractured political landscape. The yen weakened notably, with the USDJPY pair climbing to a three-month high near 154 yen.