Today, global investors are focused on Japan.
On October 27th local time, Japan held a vote for the House of Representatives election. The voting time is from 7:00 to 20:00 local time (excluding some areas). Analysts warn that Japan's ruling Liberal Democratic Party and its ruling ally Komeito Party are facing their biggest governing crisis since 2009 due to the "political black gold" scandal.
Analysts believe that if the Liberal Democratic Party's strength significantly weakens after the election, the effective governance ability of Japanese Prime Minister Shigeru Ishiba may be affected, and the election results may even have a profound impact on the future of the country's financial industry.
The latest public opinion poll shows that the Liberal Democratic Party may lose its current one party majority for the first time since 2009. Barclays pointed out that if the election results are even worse and the alliance between the Liberal Democratic Party and the Komeito Party loses too many seats to form a government, the Nikkei 225 index may plummet by 5%.
Will Japan encounter a black swan?
On October 27th local time, Japan held a vote for the House of Representatives election. The voting time is from 7:00 to 20:00 local time, except in some areas.
The Japanese House of Representatives has a total of 465 seats, and elections are held every four years. The election adopts a parallel system of small constituencies and proportional representation. In small constituency elections, voters directly vote for candidates and the one who receives the most votes is elected; Proportional representation is the process by which voters vote for each political party and allocate seats to them in a certain proportion based on the number of votes received. On October 9th, just 8 days after taking office, Japanese Prime Minister Shigeru Ishiba announced the dissolution of the House of Representatives and called for early elections.
Analysts warn that the public support for Japan's ruling Liberal Democratic Party (LDP) has been continuously declining due to the "political black gold" scandal, and it is expected that this election will bring the party its most severe election challenge in over a decade.
According to opinion polls, the Liberal Democratic Party may lose its current one party majority for the first time since 2009.
Barclays stated in its latest research report that Japan's ruling Liberal Democratic Party and its governing ally Komei are facing their biggest governing crisis since 2009.
Barclays believes that if the alliance between the Liberal Democratic Party and the Komeito Party loses its majority but still forms a government, it is expected that the Bank of Japan will remain dovish, which may curb interest rate hikes and lead to further depreciation of the yen; But if the alliance loses too many seats to form a government, it is expected that the yen will appreciate significantly, long-term bond yields will decline, and Japanese stocks will fall.
Barclays predicts that in the second case, the exchange rate of the US dollar against the Japanese yen may plummet by 2%, the yield of the 10-year Japanese treasury bond will decline by 7 basis points, and the Nikkei 225 index may even plummet by 5%.
Before the election, the Liberal Democratic Party and Komeito Party held 256 and 32 seats respectively in the House of Representatives, totaling 288 seats.
The goal of the alliance between the Liberal Democratic Party and the Komeito Party is to maintain an "absolute stable majority", which means occupying at least 261 out of 465 seats in the House of Representatives. This number of seats not only ensures the smooth progress of legislation, but also ensures that the ruling coalition has a say in various committees.
But Barclays' report points out that both the Liberal Democratic Party and the Komeito Party may face challenges even in ensuring a "stable majority" of 244 seats. According to the latest polls, the market is beginning to worry that the coalition government may not even be able to guarantee a "simple majority" threshold of 233 seats.
According to the latest polls from Asahi Shimbun and Mainichi Shimbun, even in an ideal situation, the possibility of the Liberal Democratic Party gaining a majority of seats independently is still low.
A recent opinion poll by the Asahi Shimbun in Japan shows that the Liberal Democratic Party may face difficulties in the election and may lose 50 of its current parliamentary seats, while the Komeito Party's seats may fall below 30.
The Asahi Shimbun poll estimates that Japan's largest opposition party, the Constitutional Democratic Party (CDP), may gain up to 140 seats in the election, up from the current 98.
Rob Fahey from the Waseda Advanced Research Institute in Tokyo stated that the vote counting results for the Japanese elections may be announced on Sunday evening, with only some seats (those that require a recount or involve other issues) to be announced on Monday.
May plummet by 5%
If the ruling coalition loses its majority, the Liberal Democratic Party may need to form alliances with more smaller parties, which could make it more difficult for current Prime Minister Shigeru Ishiba to push for fiscal consolidation and monetary policy normalization, and his path as prime minister may be in jeopardy as a result.
Naka Matsuzawa, Chief Macro Strategist at Nomura Securities, warned that this is essentially a situation of "selling Japan" as investors are considering how the election results will affect fiscal and monetary policies. The Japanese stock market has experienced a pullback this week, with the Nikkei 225 index falling 2.74% cumulatively.
Analysts believe that currently, although other political parties are unlikely to overthrow the Liberal Democratic Party, if the party's strength significantly weakens after the election, Shigeru Ishiba's effective governance ability may be affected. As Japan passes through this period of economic and political uncertainty, the election results will have a profound impact on the country's financial future.
Barclays pointed out that in this highly uncertain political situation, the Japanese stock market is facing triple pressure - domestic elections, US elections, and corporate financial reports.
Reviewing historical data since the 1970s, when the ruling party in Japan barely maintains a majority, the Japanese stock market often experiences sustained negative impacts, but when the situation becomes clear, the stock market quickly recovers.
Barclays pointed out that if the worst-case scenario of "tail risk" occurs, where the Liberal Democratic Party and Komeito coalition lose enough seats to form a government, the Japanese stock market may experience classic risk aversion.
Barclays expects that under such circumstances, the dollar may fall by 2% against the yen, the yield of 10-year Japanese treasury bond will decline by 7 basis points, and the Nikkei Index may plummet by 5%.
In addition, Rie Nishihara, a strategist at JPMorgan, also believes that the Japanese stock market is considering the possibility of the ruling coalition losing a majority of seats. History shows that unless the Liberal Democratic Party alone wins 60% of the seats, the Japanese stock market will decline.
Neil Newman, head of strategy at Astris Advisory Japan, said that although the Liberal Democratic Party is expected to suffer setbacks, the possibility of a government change is unlikely, which means any negative impact on the stock market may be short-lived.
Newman added that many investors will pay more attention to the outcome of next Sunday's monetary policy meeting of this central bank. The Bank of Japan's interest rate hike policy has basically been determined, but the speed at which they implement the policy may depend on the government's situation after the election.
It is worth noting that the Constitutional Democratic Party once proposed to lower the inflation target of the Bank of Japan to "above 0%", which was interpreted by the market as a "hawkish" signal and could lead to a significant increase in interest rates and a strengthening of the yen.