Tokyo, Oct 27 - Japanese stocks and the yen are projected to decline as exit polls indicate Prime Minister Shigeru Ishiba's coalition may lose its parliamentary majority in the upcoming election. The ruling Liberal Democratic Party (LDP) and its junior coalition partner Komeito may need to form power-sharing agreements with other parties, according to the polls.
The potential loss of a standalone majority by the LDP has raised concerns in Japan's financial markets. Investors are wary of political uncertainty affecting market sentiment. Samuel Hoang, a portfolio manager for Japan funds at Eastspring Investments, noted that the election outcome could negatively impact investor confidence.
A minority coalition could shift market focus towards the policy positions of opposition parties, many of which advocate for low interest rates and increased government spending. Shoki Omori, chief Japan desk strategist at Mizuho Securities, emphasized that fiscal policy will be a priority for any new government.
Ishiba, who has been in office for just a month, aimed to retain the 233 seats needed for a majority in the lower house. However, analysts from Morgan Stanley indicated that coalition losses could hinder the next government's ability to pursue significant policy changes, such as corporate tax rate increases.
This political uncertainty has already affected Japan's benchmark Nikkei share average, which fell by 2.7% last week. Longer-dated Japanese government bond yields have also risen due to concerns over a potential fiscal deficit.
The yen, pressured by increasing U.S. Treasury yields, dropped to the 152-per-dollar level for the first time in three months. Analysts at BNY predict the dollar could rise to 155 yen, influenced by the Bank of Japan's stance on interest rates and the political instability surrounding the election.
Japan's general election is set to take place shortly before the highly anticipated U.S. presidential race, prompting investors to consider the implications of a potential Republican victory on market dynamics.