Japan's ruling coalition, led by the Liberal Democratic Party (LDP) and its ally Komeito, unexpectedly lost its majority, raising concerns among Tokyo bankers about the new government's ability to deliver on promises to revitalize financial markets and strengthen Japan's asset management sector. The recent election results have cast doubt on aspirations to position Japan as a leading asset management hub.
Masahiro Ichikawa, Chief Market Strategist at Sumitomo Mitsui DS Asset Management, noted that these commitments previously acted as a positive factor for Japan's stock market and attracted international investors. However, he suggested that markets might adopt a wait-and-see approach regarding the continuation of these policies.
Japan continues to face several challenges, including a debt burden exceeding twice its GDP, as it emerges from years of deflation and attempts to rejuvenate its financial industry. The LDP's current situation resembles its predicament following the 1993 House of Representatives election, where it lost its majority yet remained the largest party. The main opposition party, the Constitutional Democratic Party of Japan, is proposing various policies, such as tax reforms, to improve the nation's fiscal situation, which might compel the LDP to collaborate with smaller parties with differing policy goals.
Ichikawa suggested that while significant policy changes are unlikely, increased caution in the market could arise due to discussions of financial income taxation and potential tax hikes by the opposition party. Nevertheless, Toyo University professor Hironari Nozaki argued that policies aimed at increasing labor and asset income align with the views of other conservative opposition parties and might have limited short-term impacts on the financial sector.
On the day following the election, the Topix index opened lower but reversed to close up 1.5%. Within the financial sector, securities stocks outperformed the Topix, while the banking subindex closed higher despite declines in some bank stocks.
In currency markets, the yen weakened by approximately 0.6% against the US dollar at 153.18, having depreciated by 1% earlier due to the election results. Michael Makdad, Senior Analyst at Morningstar, commented that yen depreciation generally benefits the profits and stock prices of financial companies, assuming other conditions remain constant. He also noted that improvements in Japanese corporate governance have gained enough societal support to mitigate political uncertainty's impact.
Professor Nozaki highlighted a potential risk in the financial markets if internal divisions within the LDP hinder the new government's governance. However, he also noted substantial room for the LDP and Komeito to collaborate with smaller parties on specific policies, which could result in disciplined government management.
