Japan: It’s all about politics - Nomura

Major Japanese local media (Kyodo, Nikkei, and Yomiuri) updated their election predictions and their latest forecasts point towards the ruling coalition (LDP/Komeito), which will likely secure around 300 seats, potentially achieving the super majority (310) again, notes Yujiro Goto, Research Analyst at Nomura.

Key Quotes

“PM Abe stated that he would resign if the coalition loses the majority (233), but we think the risk remains very low.” 

“Kyodo forecasts the LDP to gain 265-296 seats, which is slightly below its previous forecast (273-305). That said, its central case scenario shows the LDP can secure 281 seats, and with its junior coalition partner, Komeito, the ruling coalition is expected to secure the super majority. Nikkei’s forecast remains more conservative than other media, with a wider forecast range. However, the forecast still shows around 260 seats for the LDP and the collation is expected to gain nearly 300 seats. In contrast, the Party of Hope (PoH) is now expected to secure only around 50-55 seats, which is slightly lower than its seats before the dissolution of the lower house (57 seats). We have been judging the victory of the PoH as an unlikely tail risk scenario, and the possibility remains low.”

“The ruling coalition’s victory is likely the clear market consensus at the moment, and the election outcome over the weekend may not be a game changer for the JPY. JPY weakness on Monday is likely, but just a small relief rally in USD/JPY is expected now, as occurred after the previous snap elections.”

“Domestic policy focus should shift towards the appointment of the next BOJ governor. If the ruling coalition secures around or more than 300 seats, the likelihood of PM Abe securing his third term as the LDP leader (September 2018-2021) would rise significantly. The risk of hawkish shift around the BOJ leadership change should diminish, which trims key uncertainties on JPY trading. Even though the immediate FX market reaction is likely to be muted, we think the recent political development is supportive to yen-crosses. The diverging monetary policy stance of the ECB and BOJ should remain EUR/JPY positive.”