JAPANESE MARKET
Japanese shares and government bonds are likely to face initial selling pressure today after the government lost an upper house election – a reverse that could thwart its ambitions to curb public debt.
Longer term, though, markets will eye which smaller parties the ruling Democratic Party allies with, what policy compromises it makes and whether that dilutes its fiscal reform hopes.
“JGBs (Japanese Government Bonds) may come under selling on the prospect of a delay in fiscal reform, and Japanese shares may also meet with selling on the political deadlock,” said Kyohei Morita, chief economist at Barclays Capital Japan.
“But such market reactions are likely to prove short-lived because no major policy change is taking place.”
Prime Minister Naoto Kan’s Democrats were set to win just 47 seats and its tiny coalition partner, the People’s New Party, none, losing their combined majority in parliament’s upper house, exit polls after the vote yesterday showed.
Exit polls showed the Democrats far short of Kan’s goal of winning 54 seats, a result that leaves him vulnerable to challenge within his party.
Many analysts expected JGBs to come under some negative pressure, although the result could be complicated if stocks fall and investors opt for safe-haven bonds instead.
JGBs fell on Friday as investors hesitated to buy before the election and as stocks rose. The benchmark 10-year yield rose 1 basis point to 1.150 percent after hitting a seven-year low of 1.055 per cent the previous week.
“The election results will give the impression that Japan may delay in proceeding with fiscal discipline, so the bond market is expected to face some selling pressure in its initial reaction … given the recent global focus on sovereign risk,” said Yoshimasa Maruyama, an economist at Itochu Corp. Securities.
The benchmark Nikkei average rose 0.5 per cent to 9,585.32 on Friday.