Investors on Japan's upper house election outcome
Markets in Japan were closed for a holiday on Monday, but the yen strengthened while Nikkei futures rose slightly, as the election results appeared to be already priced in.
While the ballot does not directly determine whether Ishiba's administration will fall, it heaps pressure on the embattled leader and could imply either policy paralysis or a bigger fiscal deficit depending on what the ruling party does next and how strong the opposition becomes.
QUOTES:
"It was not the 'major defeat' that some had predicted, and the LDP showed a certain level of centripetal force. Second, Prime Minister Ishiba quickly declared his continuation in office last night.
"The election results have avoided the sharp yen depreciation pressure anticipated last weekend, but Japan's political situation is likely to continue exerting downward pressure on the yen."
"Most people would've thought there might be a knee-jerk negative yen reaction, but we have seen a reasonable degree of yen underperformance in the lead up to Sunday, so to some extent, I think there's a kind of 'we bought the rumour, sold the fact'.
"Our sense is that the yen strength that we've seen is probably something that will fade over time... the big thing this week is more Japan's chief trade negotiator trying to get a deal over the line, that is something other than the 25%, and to the extent that the election result weakens Japan's negotiating position - because you haven't got a coherent, united government, at the margin, I think that militates against the likelihood of anything happening that gets us back to anywhere close to a sort of 10% baseline tariff come August 1."
"USD/JPY has fallen after its re-opening this morning with the outcome of the weekend's Japanese upper house elections largely as expected. However, it can likely hold on to power by seeking coalitions or by negotiation on key legislation with minor parties to avoid collapse.
"With the worst case scenario avoided, the 200-day moving average at 149.62 looks secure for now and should see USD/JPY ease lower back towards 146.00."
RONG REN GOH, PORTFOLIO MANAGER, EASTSPRING INVESTMENTS, SINGAPORE:
"The risk of coalition loss is well appreciated, and arguably priced in - weaker yen, higher yields. We probably focus attention towards how the fiscally dovish parties do, to see whether the trade has more legs.
"Now we have got to see who won the seats from them and the two parties markets probably will be focused on are the DPP and Sanseito.
"But there are other drivers coming on the horizon for the yen, for example, the trade negotiations between the U.S. and Japan with the August deadline.
"I think the difficulty comes from the rest of the parties forming another coalition but I'm admittedly not a political expert here and I don't know how easy it will be for the government to open the spigot. I suspect these are issues we will not have visibility on in the immediate future."
SHOKI OMORI, CHIEF DESK STRATEGIST, MIZUHO SECURITIES, TOKYO (IN A NOTE):
"Prime Minister Shigeru Ishiba has so far offered no hint that he will resign, and the measured confidence of his post-election remarks suggests that he intends to remain in office.
"Many back-bench LDP legislators - wary of plunging into a leadership contest while bilateral tariff talks with Washington are unfinished and party approval ratings remain depressed - appear disinclined to 'reach for the chestnut in the fire' by forcing an early succession battle.
"Against that political backdrop, prospects for an aggressive fiscal stimulus are limited. Mr Ishiba has shown no appetite for revenue-hungry measures such as a temporary reduction of the consumption tax rate, and even a leadership change would be unlikely to accelerate the launch of a large-scale package.
"A meaningful supplementary budget, if one emerges, would not be debated until the autumn Diet session at the earliest. The only proposal now circulating within the coalition - a modest, one-off cash transfer to households - would entail little additional financing, and therefore little immediate impact on government borrowing."
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