THE yen fell to a three-month low and Japanese stocks were set to slip on Monday (Oct 28) after the Liberal Democratic Party (LDP) and its coalition partner were dealt a heavy blow in a snap election.
The currency weakened about 0.6 per cent against the US dollar, with the slide coming after four straight weekly declines that may force authorities back into the market to protect the yen. While the currency’s depreciation typically supports Japanese stocks, investors are concerned that political stability will put Prime Minister Shigeru Ishiba’s position in doubt.
“The initial reaction will be a fall in stock prices and a decline in the value of the yen,” said Tadashi Matsukawa, head of PineBridge Investments Japan’s fixed income management department. Matsukawa added that there is a possibility that bond yields will drop.
Support for the LDP and its partner Komeito fell short of the 233 seats needed for a majority in the lower house, according to a tally by public broadcaster NHK. Surveys by other media pointed to similar results.
“This could create a quagmire regarding the legislative process – a scenario which may not bode well for the yen and the Nikkei, at least in the short term,” said Tim Waterer, the Sydney-based chief market analyst at KCM Trade.
The currency is already the worst performer among its Group-of-10 peers this year, having depreciated more than 7 per cent against the greenback.
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While it is still some ways off the nadir of 161.95 set in July, the recent slide prompted Japan’s top currency official Atsushi Mimura to warn last week that he’s watching currency moves with a higher sense of urgency. The pair traded at 153.21 as of 6.01 am in Tokyo, a level last seen on Jul 31.
Meanwhile, Japanese stocks have been struggling since setting record highs in July.
“Markets would prefer the current coalition to win through,” said Gary Dugan, chief executive officer at Global CIO Office. “International investors just want to see the corporate sector continue on a path of restructuring without any noise from politics.”
Defence stocks may take a hit as they had gained on expectations that Ishiba – a former defence minister – will increase spending on security, Chiyo Takatori, an analyst at Daiwa Securities, said last week.
Still, Nicholas Smith, strategist at CLSA Securities Japan, said it needs to be remembered that Ishiba originally said he wanted higher taxes.
“The weaker the LDP is, the harder it is for him to achieve that, which is good for markets,” said Smith. BLOOMBERG
