THE RESULTS: Japan's ruling Liberal Democratic Party has lost its absolute majority in the country's lower house, casting doubt on Prime Minister Shigeru Ishiba's ability to govern and uncertainty over what his administration's mandate will look like. Results reported by public broadcaster NHK showed that the LDP-Komeito coalition didn't win enough seats to secure a majority, meaning a new partner will need to be brought in.
BOJ IMPACT: A restructured coalition could affect Bank of Japan policymaking. The election result "will naturally work as a headwind against normalizing monetary policy," SMBC Nikko Securities economists said. But that doesn't necessarily exclude the possibility of rate hikes, as no political party would tolerate an excessive yen weakening, they said. A broader coalition could force the prime minister to quell his support for the BOJ to continue gradually removing ultra-loose monetary policy, NAB senior foreign-exchange strategist Rodrigo Catril said.
ECONOMIC POLICY: Despite the heightened uncertainty, economic policy--including the BOJ's 2% inflation target--is likely to remain intact, Morgan Stanley MUFG Securities economists said. They continue to expect a rate hike in the coming months, "but if political uncertainty persists or markets become turbulent, the bar for the BOJ acting this year may become higher."
FISCAL POLICY: The political instability could end up boosting fiscal expenditure, Citi Research rates strategist Tomohisa Fujiki said. A pressing issue is whether there will be a government in place to pass the customary supplementary budget due at the end of the year, said Marcel Thieliant, head of Asia-Pacific at Capital Economics. Ishiba has pledged bigger spending than last year's 13 trillion yen. "The political kerfuffle will keep fiscal policy on hold for the time being," said Stefan Angrick, senior economist at Moody's Analytics.
THE MARKET REACTION:
-- USD/JPY rose to 153.22, its highest level since July 31.
-- Japanese stocks climbed, with the Nikkei Stock Average up 1.8%.
-- The Japanese government bond yield curve steepened, with the five-year JGB yield up 0.5 basis points at 0.580% and the 30-year yield up 4.5 basis points at 2.215%.
WHAT'S NEXT: Markets will be watching to see what form the new government will take as the LDP-Komeito coalition looks to secure a majority. LDP will need to forge an untested coalition to stay in power, which will undermine its ability to pass major pieces of legislation, said CE's Thieliant.
The first port of call will likely be the Democratic Party for the People, which quadrupled its seats, with the Japan Innovation Party (Ishin) another option. "The coalition may need both. It may get neither," said Moody's Analytics' Angrick, expecting calls for Ishiba's resignation to intensify.
Opposition parties will try to form a government, but given large policy differences, this seems less likely, he said. "As different parties and groups within parties vie for power, abrupt policy shifts are possible."
--Additional reporting by Megumi Fujikawa, Ronnie Harui, Kosaku Narioka
Write to Singapore Editors at singaporeeditors@dowjones.com
(END) Dow Jones Newswires
10-27-24 2315ET
