Japanese stocks climbed on Monday as the yen plummeted to a three-month low following Prime Minister Shigeru Ishiba’s coalition losing its parliamentary majority in a disappointing election result on Sunday, creating uncertainty about future policies and the economy.
Ishiba’s Liberal Democratic Party (LDP), which has dominated Japanese politics for nearly all of the post-war era, along with its junior coalition partner Komeito, secured 215 seats in the lower house, falling short of the 233 needed for a majority. Previously, the LDP held 247 seats and Komeito had 32.
This outcome could lead to contentious power-sharing arrangements, potentially resulting in political instability.
The Nikkei share average rose 1.82% to 38,605.53, having increased by as much as 2.2% during the day, despite opening 0.4% lower.
The yen continued its decline throughout the morning, hitting 153.885 per dollar for the first time since July 31. It was trading about 0.8% lower at 153.505 per dollar by 0600 GMT.
“The election result is.undoubtedly negative for the stock market due to heightened political uncertainty,” stated Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management.
“However, the rally can also be attributed to the relief of having this major risk event behind us, along with the impact of the weaker yen.”
A weaker yen is advantageous for Japan’s major exporters, as it increases the value of their overseas sales and makes Japanese stocks more attractive to foreign investors.
The transport equipment sector was the top performer among the 33 industry groups on the Tokyo Stock Exchange, rising 3.5%. Toyota (NYSE:TM) saw an increase of over 4%, while Nissan (OTC:NSANY) gained 3.5%.
Stocks in the chip sector also excelled, benefiting from gains in U.S. counterparts on Friday, with chip-testing equipment manufacturer Advantest soaring 4.6%.
“I don’t anticipate that the rally will last,” remarked Norihiro Yamaguchi, senior Japan economist at Oxford Economics. “The equity market is likely to remain subdued until political uncertainty is resolved. I expect bond yields to remain elevated as concerns about looser fiscal management grow.”
Benchmark 10-year Japanese government bond futures fell 0.19 yen to 143.87 yen, reversing an earlier gain.
The yield curve steepened, with the two-year JGB yield rising by 0.5 basis points (bps) to 0.45%, and the 30-year yield increasing by 5 bps to 2.22%. The 10-year yield climbed 2.5 bps to 0.97%.
The election results have drawn attention to the policy positions of opposition parties that could potentially form coalitions, many of which advocate for low interest rates. Analysts at Morgan Stanley noted that coalition losses might reduce the likelihood of the next government pursuing “more challenging agenda items, such as raising the corporate tax rate.”
BNY analysts suggested that the dollar could rise to 155 yen again, as the Bank of Japan (BOJ) downplays the immediate need for a rate increase. The central bank will next review its policy on Thursday, with no changes anticipated.
Japan’s general election occurs just nine days before the results of the closely watched U.S. presidential race, with investors considering the possibility of a stronger dollar and higher yields if Donald Trump were to win again alongside a Republican sweep of Congress.
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