Quick view: Japanese election sparks market jitters, political uncertainty
Junichi Inoue, Head of Japanese Equities, outlines the fallout of an electoral setback for Japan’s Liberal Democratic Party, as the country navigates political uncertainty with potential government reformation and market instability.
2 minute read
Key takeaways:
- The resignation of the Kishida administration and the unexpected election outcome under Prime Minister Shigeru Ishiba’s leadership have plunged Japan into political uncertainty.
- Monitoring the unfolding political developments closely will be crucial, as the establishment of a new government framework could significantly impact market trends.
- Should the Liberal Democratic Party remain at the helm, capital market’s focus may gradually shift towards identifying undervalued assets and recognising solid corporate performance.
Facing a general election for the House of Representatives within a year, the Kishida administration, struggling with persistently low approval ratings, stepped down, entrusting Japanese Prime Minister Shigeru Ishiba with the task of recovering lost ground for the Liberal Democratic Party (LDP).
However, despite his initial popularity, especially in rural constituencies, Ishiba’s support has seen a steady decline since he assumed office, culminating in a surprising electoral outcome where the LDP failed to secure a majority, both independently and in coalition.
The recent general election, which posed significant challenges for the ruling party, ended in a scenario few had anticipated. Analysts point to the LDP’s ambiguous handling of a political funding scandal linked to the former Prime Minister Shinzo Abe’s faction as one contributing factor. However, the broader issue appears to be widespread dissatisfaction with rising inflation—a sentiment mirrored in electoral trends worldwide.
Japan at a political crossroad
As Japan grapples with political instability, the need for a strategic response, particularly one that addresses the concerns of lower-income groups, has become increasingly evident. Prime Minister Ishiba, despite initially refusing to step down, has vowed to take responsibility for the election’s outcome by dutifully serving his role. Yet, with another critical election for the House of Councillors on the horizon, maintaining a stable government under the current conditions seems an uphill battle.
The country now stands at a crossroads, contemplating three potential paths forward: forming a coalition government with an opposition party, navigating the complexities of a minority government, or witnessing the Constitutional Democratic Party of Japan (CDPJ) spearhead a coalition with other opposition entities. Given the significant policy discrepancies among these opposition parties, the likelihood of a unified opposition appears slim.
A decision regarding the new government framework is anticipated within the month, amidst ongoing market instability. Since August, market trends have been unpredictable, and this trend is expected to persist until a stable government is established.
Capital markets responded unfavourably to policies implemented by the DPJ between 2009 and 2012. As such, the prospect of opposition parties, such as the CDPJ gaining power has prompted concerns over potential market aversion to risk. Conversely, should the LDP remain at the helm, capital market’s focus may gradually shift towards identifying undervalued assets and recognising solid corporate performance.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
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- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
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- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
2 minute read
Key takeaways:
- The resignation of the Kishida administration and the unexpected election outcome under Prime Minister Shigeru Ishiba’s leadership have plunged Japan into political uncertainty.
- Monitoring the unfolding political developments closely will be crucial, as the establishment of a new government framework could significantly impact market trends.
- Should the Liberal Democratic Party remain at the helm, capital market’s focus may gradually shift towards identifying undervalued assets and recognising solid corporate performance.
