In early October, Japanese Prime Minister Shigeru Ishiba called for early elections, but the outcome was counterproductive. For the first time since 2009, the ruling coalition in Japan failed to secure a majority in parliament, leading the country into a period of political instability. The yen fell to a three-month low, while the Japanese stock market rose on expectations that the coalition government would implement large-scale spending plans to stimulate the economy.
Ruling Coalition’s Major Setback Casts Political Uncertainty Over Japan
According to NHK statistics, the Liberal Democratic Party (LDP) and Komeito Party together secured 215 seats, falling short of the 233 seats needed for a majority in the House of Representatives. An additional 250 seats were divided among six other parties. The political uncertainty may complicate the outlook for the Bank of Japan (BOJ), which is trying to find the right timing to raise interest rates again. The market widely anticipates that the BOJ will maintain interest rates at its meeting on October 31.
Will the BOJ Raise Rates in December?
According to Bloomberg, Takeshi Minami, chief economist at Norinchukin Research Institute, believes that a rate hike by the BOJ in December remains a key expectation in the market. The LDP’s significant defeat leaves time until December, but the challenge is that the BOJ has indicated it will not raise rates during periods of market volatility. The impact of the upcoming U.S. presidential election is still to be seen, thus increasing market uncertainty.
(Will the BOJ’s hawkish stance raise rates to 0.25%, signaling the end of the cheap yen?)
Yen Continues to Depreciate
The dollar has risen against the yen for four consecutive weeks, currently priced at 153.88. Although it is still some distance from the peak of 161.95 in July, Japanese foreign exchange official Atsushi Mimura warned last week that he is closely monitoring the exchange rate movements, increasing the risk of Japanese authorities returning to the market to protect the yen. Traders, considering the political uncertainty and the uncertainty surrounding the BOJ’s potential rate hike, have seen the yen depreciate by over 6% this month, making it the worst-performing currency among the G10. Expectations of a resurgence of Trump trades have also bolstered the dollar, further driving the yen’s depreciation.
(With Trump’s chances of winning increasing, what is trending in the market? Is Bitcoin also considered a Trump trade?)
