There was a cautious tone from wealth managers after a move was made to dissolve parliament and call new elections.
Japan’s Nikkei-225 Index of equities held its ground after rising
earlier this week on news that the Asian country’s first-ever
female prime minister, Takaichi Sanae, had decided to dissolve
the lower house of parliament in the upcoming Diet session, which
begins next Friday.
The index is up 4.5 per cent so far this year, although it was
down a touch yesterday. The yen weakened: The dollar/yen rate
rose earlier this week, reaching ¥158.91, a level last observed
on 12 July 2024 when Japanese authorities injected money into the
economy to support growth. It held around the ¥159 rate in
mid-afternoon London trade yesterday.
The move is a bid by Takaichi to assert her authority amid years
of the LDP slumping in the polls and political power.
Wealth managers responded to the snap election decision with a
touch of nerves yesterday.
“The gamble is a bold one. While Takaichi’s cabinet approval
ratings have climbed as high as 75 to 76 per cent – outstripping
even some of Shinzo Abe’s peaks – support for the LDP [ruling
Liberal Democratic Party] itself remains far weaker, hovering in
the mid-30s and lower than before its heavy defeat in 2024,”
Daniel Hurley, portfolio specialist at T Rowe Price, said.
Takaichi has been in office since last October, when she formed a
coalition with the Japan Innovation Party. Her administration
holds a small majority in the lower house.
The premier has “burnished her image as a decisive agent of
change, winning plaudits from younger voters and conservatives
alike through high-profile diplomacy,” Hurley wrote.
Japanese equities rose on expectations that a Takaichi victory
would restore political direction and clear the way for fiscal
stimulus. The yen, on the other hand, is weighed by fears of
looser fiscal policy.
“The TOPIX [stock market benchmark] has risen over 30 per cent
over the past year and we think that there is little room for
further re-rating of the market; expectations of a Takaichi win
and subsequent fiscal stimulus and yen depreciation are priced
in,” Hurley said. (The Nikkei Index ranks stocks by price and
tracks the top 225 companies listed on the Tokyo Stock Exchange.
In contrast, TOPIX ranks stocks by free-float adjusted market
capitalisation.)
At the Goldman Sachs Investment Strategy Group, the risk of a
snap election was mentioned in its 2026 Outlook report,
co-authored by Sharmin Mossavar-Rahmani, head of ISG and CIO of
Goldman Sachs Wealth Management, and Brett Nelson, head of
tactical asset allocation for ISG. (The report was issued prior
to the actual election announcement.)
“The key risk for Japan lies in the interaction between its
monetary and fiscal policies. We expect the BOJ to deliver two
25-basis-point rate increases, in the second and fourth quarters
of 2026, lifting the policy rate to 1.25 per cent. While still
below most estimates of Japan’s neutral rate, this higher policy
rate could nonetheless raise borrowing costs for an already
heavily indebted government,” the authors said. “That debt burden
is likely to increase further under Prime Minister Sanae
Takaichi, following the announcement of a ¥21 trillion spending
package late last year. Taken together, tighter monetary policy
and rising public debt could intensify market worries around
Japan’s long-term fiscal sustainability.”
“The news that snap elections are to be called in Japan will do
little to help the beleaguered Japanese government bond (JGB)
market,” Colin Finlayson, investment manager at Aegon Asset
Management, said.
“JGB yields had been rising in response to the prospect of
further rate hikes from the Bank of Japan and this was
accelerated after Prime Minister Takaichi’s surprise victory last
year to become the leader of the ruling LDP party,” Finlayson
said. “Her pro-growth stance, and willingness to use fiscal
spending to achieve this, has spooked the JGB market and has seen
30-year yields hit their highest level since the late 1990s. This
election could increase her grip on power and the chances of her
mandate being delivered.
“JGBs had already looked unattractive, and this news does nothing
to change that. Much of the pain has been felt by long-dated
bonds, and with little or no natural demand for them, buying them
today simply on a valuations basis alone is not enough and
further underperformance should be expected,” Finlayson
added.
AloJapan.com