JPY and Japanese Equities: Navigating Political Instability and BoJ Uncertainty

Macro
Charu Chanana

Head of FX Strategy

Key points:

  • Political Instability: Japan’s ruling LDP lost its majority, sparking political uncertainty that raises risks for the yen and Japanese assets. The coalition formation process may take weeks and could finally mean more fiscal spending.
  • Impact on BoJ Policy: The instability pressures the BoJ's policy path, with Thursday’s meeting in focus. Governor Ueda may hint at delayed policy normalization due to potential fiscal risks.
  • Yen Weakness: Rising U.S. yields and Japan’s political uncertainty have pushed USDJPY to three-month highs, increasing downside risks for the yen.
  • Support for Japanese Equities: Despite the political noise, yen weakness, more spending and structural corporate reforms in Japan may keep Japanese equities attractive, especially amid potential supply chain shifts and Japan’s role as a stable regional player.

--------------------------------------------------------------------------------------------

Japan’s ruling LDP coalition lost its majority in snap elections over the weekend, as voter frustration over a series of scandals diminished support for PM Shigeru Ishiba’s party. With the need to form a new coalition, the government could face weeks of political negotiations, adding a layer of instability that signals risk for both Japanese assets and the yen.

Looking further ahead, a more divided coalition may feel compelled to implement substantial fiscal spending, complicating the Bank of Japan's (BoJ) path to policy normalization. The BoJ’s policy decision on Thursday will be closely watched in light of these developments.

BoJ Path Becomes More Clouded

The BoJ’s meeting this week comes amid significant political uncertainty, making the outlook increasingly complex. Although Governor Ueda preemptively ruled out a rate hike for this meeting, markets are anticipating a possible rate increase in December or January. A key focus will be on whether Ueda indicates further delays in BoJ policy normalization as he navigates the potential for heightened fiscal spending in an unstable political environment.

Political Instability Weighs on Yen

The yen has faced headwinds from rising U.S. yields, driven by:

  1. The resilience of the U.S. economy, which limits expectations for a sharp easing from the Federal Reserve.
  2. Growing odds of a Republican victory in the November 5 U.S. elections, which could raise fiscal spending.

Political uncertainty in Japan has added further pressure, with USD/JPY reaching fresh three-month highs of 153.84 after the election results. Given these conditions, the yen could face additional downside as markets assess the implications of fiscal uncertainty on BoJ policy.

Japanese Equities: Opportunities Amid Instability

Despite the political turbulence, Japanese equities may find support. Yen weakness and easing oil prices, helped by a moderation in geopolitical risks following Israel's measured response to Iran over the weekend, have boosted near-term sentiment.

In the long term, these election results could suggest a structurally weaker yen which remains broadly positive for Japanese exporters. Moreover, scope for increased fiscal stimulus as well as a potential for slower BOJ rate hikes could also be a tailwind for Japanese corporates, that are already enjoying the momentum from corporate reforms. The focus on capital expenditure, governance, and return on equity underscores structural resilience in Japanese equities. As Japan is viewed as a stable geopolitical player in Asia, particularly amid U.S. election risks, Japanese equities appear well-positioned. They could also benefit from potential supply chain restructuring in the wake of U.S. policy shifts.

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.