(Bloomberg) — Japanese stocks rose Monday while the yen extended losses to 1% as investors pondered the impact of the Liberal Democratic Party and its coalition partners losing their majority.
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The currency’s decline to 153.88 against the dollar comes after four straight weeks of declines. That again raised the risk that authorities could jump back into the market to protect the yen as traders consider when the Bank of Japan is likely to raise interest rates again in light of political uncertainty.
“This result is certainly a concern for many investors as there is no clear picture of who will lead the country,” said Hebe Chen, market analyst at IG Markets Ltd. “The Liberal Democratic Party is in a very difficult position and there are no easy options.”
The yen has depreciated 7% against the dollar this month, making it the worst performer among the 10-nation group.
The tech-heavy Nikkei 225 Stock Average and the broader Topix index both fell slightly before quickly rallying more than 1%.
While political instability generally has a negative impact on stocks, it remains possible that Prime Minister Shigeru Ishiba will continue to gain support. Currency declines also tend to support stock markets.
“This is an unexpected reaction,” said Shuji Hosoi, chief strategist at Daiwa Securities. “Political risks may increase, but there may be an expectation that the Ishiba administration will not immediately fall into a lame duck.”
According to a tally by public broadcaster NHK, support for the Liberal Democratic Party and its partner Komeito fell short of the 233 seats needed for a majority in the House of Representatives. Similar results were found in other media surveys.
In the bond market, the benchmark 10-year government bond yield rose 1.5 basis points to 0.96%. Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management Co., said the Liberal Democratic Party would work with parties that promise to cut consumption and income taxes and are likely to pursue expansionary fiscal policies. He said he could.
Much of the currency’s weakness reflects Japan’s ultra-low interest rates compared to the United States and other major economies. With the BOJ widely expected to keep policy rates unchanged at its meeting that ends on Thursday, this wide gap is unlikely to change significantly anytime soon.
