Japan experiences a period of unstable politics
In the aftermath of the 2025 general election, Japan finds itself in a period of political uncertainty. The ruling Liberal Democratic Party (LDP) lost its majority in the upper house, paving the way for a more fragmented political landscape and the rise of opposition and more right-wing parties. This shift introduces both uncertainty and opportunity for the Japanese stock market.
Despite the instability, the Nikkei stock index is expected to remain strong. Analysts predict that it will stay above 40,000 and potentially surpass last year’s highs. This optimism is driven by positive factors such as a Japan-U.S. trade deal that eases tariff negotiations and improves corporate earnings visibility.
The loss of the LDP’s majority in the Diet means more complex politics, likely complicating fiscal and monetary policy decisions. The opposition's push for more aggressive fiscal stimulus and consumption tax cuts could lead to looser fiscal policy, supporting equities but also risking higher long-term interest rates and a stronger yen.
The Bank of Japan’s monetary policy stance faces uncertainty, as inflationary pressures could re-emerge with potential stimulus, complicating the Bank’s policy path. Investor sentiment might be cautious due to fiscal sustainability concerns and political unpredictability, but improved trade relations with the U.S. offset some of this risk.
The ruling coalition, consisting of the LDP and Komeito, lost its majority in the latest general election, ending up with 215 seats in Japan's Diet, down from 279. The election results were unexpected, with hardly any investors seeming prepared for this upset.
The LDP has been "dogged" by a scandal involving illegally given campaign funds. In the final week of the election campaigning, it was revealed that some individuals, who had been forced to stand as independents, were receiving party money anyway.
The election result is the worst for the LDP since 2009. Ishida, the party leader, called a snap election to capitalize on his honeymoon period, but his approach of making deals for individual pieces of legislation instead of trying to boost fiscal spending and delay raising interest rates may lead to paralysis in the Diet, further eroding his support.
In the face of this political turmoil, Japanese CEOs are likely to stay focused on growing high-return businesses, offloading underperforming ones, and shrinking asset piles on their balance sheets. The structural reforms initiated by former PM Shinzo Abe in 2012 are likely to continue to pay off.
For investors, it's crucial to watch developments in fiscal policies, interest rate movements, and coalition dynamics closely to gauge longer-term market impact. Exclusive early access to news, opinion, and analysis from a team of financial experts is available with a website subscription. The Nikkei 225 has hit levels not seen for more than 30 years, suggesting that the stock market may be able to weather this political storm. However, caution and careful monitoring remain key.
- The political uncertainty following the 2025 general election, with the loss of the Liberal Democratic Party's (LDP) majority in the Diet, might lead to complexities in fiscal and monetary policy decisions, potentially causing an increase in long-term interest rates and a stronger yen due to the opposition's push for more aggressive fiscal stimulus and consumption tax cuts.
- The Bank of Japan's monetary policy stance faces uncertainty as well, with inflationary pressures potentially re-emerging due to possible stimulus, which might complicate the Bank's policy path. Investors should closely monitor developments in fiscal policies, interest rate movements, and coalition dynamics to gauge the longer-term market impact.
