Financial markets in Japan remain on high alert because an upcoming upper house election has the potential to change the economic policy trajectory of the country. Japanese government bond yields for 30-year maturities reached their highest point at 3.20% this week because of continuous market selling which also caused the yen to decline against both the dollar and euro.
The current ruling coalition under Prime Minister Shigeru Ishiba’s Liberal Democratic Party and its partner Komeito faces a predicted loss of its upper house majority. The government would need to form new alliances because of this development which has created market uncertainty.
Market stability would be achieved if the coalition unexpectedly secured a majority in the upcoming election. A coalition victory would reduce bond market stress while strengthening the yen because investors would expect less debt-funded tax reduction. The JGB market should experience a recovery after the eight-day bond sell-off which increased yields by 35 basis points.
Recent polls indicate that the LDP-Komeito bloc faces a higher probability of losing strength in the upcoming election. The political landscape may shift toward new alliances because the Democratic Party for the People supports easier monetary policy. Japan’s fiscal and monetary direction faces increased uncertainty because of potential leadership changes which could include Prime Minister Ishiba stepping down.
Japanese markets will experience high market volatility on Monday because they observe a holiday.
