The yen fell to three-month low and futures pointed to a drop in Japanese stocks Monday after the Liberal Democratic Party and its coalition partner were dealt a heavy blow in a snap election.
The currency weakened as much as 0.6% against the dollar, before trimming some of the move, with the slide coming after four straight weekly declines. That’s again raised the risk that authoritiers may wade 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. Futures for the Nikkei 225 traded in Chicago opened lower, suggesting the market in Tokyo may start the session down more than 1%.
“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.
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“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% against the greenback.
Much of the currency’s weakness reflects the ultra-low level of interest rates in Japan relative to the US and other major economies. This wide gulf is unlikely to change significantly anytime soon, with the Bank of Japan widely expected to keep its policy interest rate unchanged at a meeting that concludes Thursday.
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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 higher sense of urgency. The pair traded at 152.82 as of 8.40am in Tokyo.
“Short-term this is negative for the market,” said James Salter, founder and chief investment officer of Zennor Asset Management. “The yen could weaken further and reignite the whole ‘carry trade’ concerns of August.”
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.”
Defense stocks may take a hit as they had gained on expectations that Ishiba — a former defense 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.
Charts: Bloomberg
