On the 28th, Japan experienced a &#34;black swan&#34; event as the ruling party suffered a devastating defeat in the previous day's general election. The Nikkei 225 index closed higher while the Japanese yen depreciated.
This defeat for the Liberal Democratic Party (LDP) is the worst since 2009, signaling the loss of parliamentary dominance for the ruling coalition and marking a new chapter in Japanese politics. The focus now shifts to whether Fumio Kishida can maintain power.
According to the Japanese constitution, a special session of the Diet must be convened within 30 days of the Lower House election. At that time, the current Kishida Cabinet will collectively resign, and the next Prime Minister will be nominated by the Lower and Upper Houses composed of newly elected members. If Kishida secures re-election, it will form the second Kishida Cabinet; if there is a change in leadership, Kishida could potentially become the shortest-serving Prime Minister in post-war Japan.
Currently, Kishida has stated that he will not resign. This means that the LDP needs to seek new coalition partners. Analysts suggest that the LDP may be forced to compromise with opposition parties that have drastically different policy agendas.
Some media outlets predict that Kishida will resign to take responsibility, becoming the shortest-serving Prime Minister in post-war Japan. Others believe that even if the LDP does not secure a majority, it remains the largest party in the Lower House and may form a coalition with more smaller parties to continue governing. Kyodo News Agency has expressed concerns that Japanese politics may enter a period of turmoil.
Economist and long-time Japan observer Jesper Koll believes that the election results will intensify internal conflicts and confrontations, making reforms almost impossible to achieve:
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&#34;A key pillar of the bullish argument for Japan in the realm of money and investment is that Japan is a fortress of political and policy stability. After today's election, this argument will become even harder to refute.&#34;
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In its latest research report on the 28th, Goldman Sachs believes that the election results will not lead to significant changes in fiscal and monetary policies. However, the administrative power of the ruling coalition will inevitably become more fragile, given some opposition parties' calls for further fiscal expansion, which may create greater pressure in the future.
Citigroup analyst Katsuhiko Aiba stated in a report released on the 27th that while some believe that political instability will make it difficult for the Bank of Japan to raise interest rates, &#34;this is by no means obvious.&#34;
<h2>Political Turmoil Intensifies Ahead of Bank of Japan Interest Rate Decision on Thursday</h2>
According to Xinhua News Agency, in the 50th Lower House election held on the 27th in Japan, the ruling coalition secured a total of 215 seats, failing to surpass half of the 465 seats in the Lower House.
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&#34;Japan has not reached the social atmosphere of the 2009 downfall of the LDP-Komeito coalition and the Democratic Party coming to power. In this context, Kishida will not step down,&#34; said Cai Liang, Director of the Northeast Asia Research Center at the Shanghai Institute for International Studies, in an interview with The Paper on the 28th. He mentioned that voters punished the LDP for the &#34;black gold&#34; scandal, but if Kishida mishandles the aftermath and remains obstinate, the LDP will suffer heavy losses in next year's Upper House election, leading to Kishida's resignation
Now is equivalent to the Japanese people giving Shigeru Ishiba a &#34;probationary observation&#34; punishment.
This Thursday, the Bank of Japan will hold an interest rate decision, followed by Governor Haruhiko Kuroda holding a press conference. Among the economists surveyed by Reuters, about 86% expect the Bank of Japan to maintain interest rates.
Izumi Devalier, Chief Japan Economist at Bank of America, said that despite increasing political uncertainty, the likelihood of the Bank of Japan raising interest rates this week is &#34;close to zero.&#34;
However, she added that the Bank of Japan cannot ignore the continued weakening of the yen:
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&#34;I don't think this necessarily means that the Bank of Japan will stand still in the foreseeable future. Clearly, they have to pay attention to market developments, but we may still raise interest rates in January or even December, depending on the yen's movement.&#34;
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Citigroup analyst Katsuhiko Aiba also shares a similar view, writing in a report released on the 27th: &#34;Some believe that political instability will make it difficult for the Bank of Japan to raise interest rates, but this is by no means obvious.&#34;
Citigroup also predicts that despite Prime Minister Shigeru Ishiba's intention to remain in office, he faces pressure to step down within the Liberal Democratic Party. With the APEC meeting and G20 summit approaching, diplomatic schedules may expedite the formation of a new government.
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&#34;Even after the Lower House election, we still believe that the Bank of Japan is unlikely to change its interest rate hike cycle due to the government. However, if Prime Minister Shigeru Ishiba steps down and pro-loose monetary policy Takaichi Sanae becomes the new leader of the Liberal Democratic Party, there is a risk.&#34;
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<h2>In the long run, political turmoil will have a negative impact on the stock market</h2>
Goldman Sachs believes that the election results will not bring significant changes in fiscal and monetary policy. However, the administrative power of the ruling coalition is inevitably becoming more fragile, given that some opposition parties advocate further expanding fiscal policy, there may be greater pressure in the future.
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&#34;Regarding monetary policy, Japan's policy rate hike pace and inflation trend should remain unchanged, although political uncertainty may affect the timing of rate hikes, we predict a rate hike in January 2025 as the base scenario.&#34;
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Hirofumi Suzuki, Chief Foreign Exchange Strategist at Sumitomo Mitsui Banking Corporation, stated that the formation of a coalition government is expected to boost stock prices, while the yen is likely to weaken.
However, in the long run, political turmoil will have a negative impact on the stock market. Masatoshi Kikuchi, Chief Equity Strategist at Mizuho Securities, said:
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&#34;The Liberal Democratic Party is trying to find coalition partners, but this may bring difficulties, meaning it will be unable to implement policies, so the market will remain cautious in the coming weeks.&#34;
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Nomura Securities also stated in a research report released on the 28th that if the pressure within the Liberal Democratic Party for Shigeru Ishiba to resign continues to increase, the market may anticipate that the new government will adopt a more accommodative economic policy.
Nomura stated that in the short term, political uncertainty may lead to a weakening of the Japanese stock market, strengthening the yen; but in the long term, the Bank of Japan's monetary policy will not undergo a major shift, and the market is more likely to focus on the upcoming U.S. presidential election, which may limit the weakness of the yen. .
In addition, the market is more likely to shift its focus to the upcoming U.S. presidential election. Nomura believes that whether the USD/JPY will continue to rise in the coming weeks will largely depend on whether Trump will win with a &#34;red sweep&#34;.
Previously, Barclays had predicted that if the Liberal Democratic Party and Komeito alliance lost enough seats to form a government, the USD/JPY could fall by 2%, the 10-year Japanese government bond yield could decline by 7 basis points, and the Nikkei 225 index could plummet by 5%

Shinzo Abe has already stated that he will not resign, which means the Liberal Democratic Party needs to find new alliance partners. The uncertainty of the political situation is increasing, and the Bank of Japan's future interest rate decisions may be more cautious. In the long run, political turmoil will also have a negative impact on the stock market

A major earthquake in the Japanese political arena, what does it mean for the market?