Institutional investors are bracing themselves for market turbulence in Japan after the country’s ruling coalition lost its absolute majority in the House of Representatives.
In a snap election on Oct. 27, Japan’s ruling coalition comprising the Liberal Democratic Party and Komeito failed to clinch the 233 seats needed for a majority in the 465-seat lower house of parliament.
Prime Minister Shigeru Ishiba had called the election days after taking the reins in early October in an attempt to solidify his position. The Liberal Democratic Party had been losing public support after a scandal involving the underreporting of campaign funds came to light in late 2023.
“We believe that the loss of political stability following the results of this election will be a negative factor for Japanese stocks," Yuko Iizuka, economist at the $451 billion Japanese fund manager Asset Management One, said in emailed comments. "In particular, if coalition negotiations centered on the LDP and Komeito end in failure and the LDP is forced to step down from power, the market could become turbulent.”
Money managers said that the LDP’s moves over the next week will more clearly reveal the election’s impact on the country’s economy and equity market. For instance, if the ruling coalition will expand to include other parties, or if other parties come together to form a new coalition government.
“If a coalition with the Democratic Party for the People or Japan Restoration Party is formed or cooperation from outside the cabinet is achieved, fiscal spending will likely expand ahead of the House of Councillors election in the summer of 2025. Expectations for large-scale fiscal spending are expected to support the stock market,” Tokyo-based Iizuka said.
However, regardless of how the government will shape up to be, policy implementation could become less smooth than before, David Chao, Singapore-based global market strategist for Asia-Pacific ex-Japan at the $1.8 trillion Invesco, said in written commentary.
“A loss of the majority in parliament will make it tougher for Prime Minister Ishida and his ruling party to implement core policies and strategies,” he wrote.
“Following the election results, the JPY weakened to around 153 against the USD and the Nikkei rallied +1.5% in early trading,” he said. But despite this knee-jerk reaction, “we can expect further policy uncertainty which could be a source of market volatility in the near-term,” he added.
He also noted that the market interpreted the LDP’s loss as a positive because “Ishida’s proposed policies were not seen as good for markets.”
“Specifically, Ishiba’s policy platform stands in sharp contrast with former Prime Minister Abe’s,” he wrote. “Under Abe’s administration, the government flooded the market with ample liquidity and spent lavishly, while Ishiba’s platform aims to hike taxes and rein in spending.”
“The market also believes that the election defeat of the ruling collation may slow the policy tightening process by the Bank of Japan,” he said.
In the long term, however, Japan’s markets still look positive, as the labor market remains tight and will likely continue to drive real wage growth and consumption. “This is a structural transformation of the economy that can outlast whichever political party is in power,” he said.
Any negative impact on equities would likely dissipate over time, and the market’s focus could drift further away from the political scene, agreed Naoki Kamiyama, Tokyo-based chief strategist at Nikko Asset Management, which had $229.1 billion in AUM as of June 30.
“What matters in the end, from a market perspective, is corporate earnings. Japanese companies have generally been posting strong earnings: the Nikkei estimates that 70% of the firms surveyed beat market profit forecasts in the April-June quarter. We will be focusing on mid-year earnings in autumn and then the results in January to confirm this trend,” he said.