(Bloomberg) — The yen extended losses to 1% while Japanese stocks rose Monday as investors pondered the ramifications of the Liberal Democratic Party and its ruling coalition partner losing their majority.
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The currency’s decline to 153.88 against the dollar came after four consecutive weekly declines. This has once again increased the risk of authorities returning to the market to protect the yen, as traders consider when the Bank of Japan is likely to raise interest rates again given political uncertainty.
“This result is definitely a concern for many investors, because we do not have a clear picture about who will lead the country,” said Hebei Chen, market analyst at IG Markets Ltd. “The LDP is in a very difficult situation and there is no single option that can be easily resolved.”
The yen fell by 7% against the dollar this month, the worst performer among its G10 peers.
The stock-heavy Nikkei 225 and the broader Topix index opened slightly lower before quickly turning to gains of more than 1%.
While political instability is usually a negative for stocks, there is still a possibility that Prime Minister Shigeru Ishiba can secure enough support to remain in office. Currency declines also tend to support the stock market.
“This is an unexpected reaction,” said Shuji Hosui, chief strategist at Daiwa Securities. “While political risks may be increasing, there may be expectations that the Ishiba administration will not become a lame duck immediately.”
Support for the Liberal Democratic Party and its partner Komeito did not reach the 233 seats needed to obtain a majority in the House of Representatives, according to a tally conducted by the Japanese Broadcasting Corporation (NHK). Surveys conducted by other media outlets indicated similar results.
In the fixed income market, the yield on benchmark 10-year government bonds rose 1.5 basis points to 0.96%. The LDP may team up with a party that has pledged to cut consumption and income taxes and is likely to pursue expansionary fiscal policies, said Katsutoshi Einadom, chief strategist at Sumitomo Mitsui Trust Asset Management.
Much of the currency’s weakness reflects the very low level of interest rates in Japan relative to the United States and other major economies. This wide gap is unlikely to change significantly any time soon, as the Bank of Japan is widely expected to keep interest rates unchanged at the meeting that concludes on Thursday.
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