If the poll results come true, Japanese stocks may "decline for a long time" after the election

With the Japanese elections approaching, the $6.8 trillion stock market faces a "clearing" moment.

On Wednesday, according to several local Japanese polls, the ruling coalition led by Prime Minister Shigeru Ishiba may lose its majority in the upcoming Senate elections this weekend. Last October, Ishiba's government unexpectedly lost its majority in the House of Representatives, and if it suffers another setback in the Senate, it will weigh down the country's $6.8 trillion stock market.

Since the beginning of this month, the Japanese stock market has underperformed the MSCI Global Index. Investors are concerned about the governing ability of a potential weak minority government, especially as the August 1 trade agreement negotiation deadline approaches, which will test its handling of trade relations with the U.S. and its control over national finances.

Meanwhile, market tensions have also spread to the bond and currency markets. The yield on Japan's 10-year government bonds hit a 17-year high on Tuesday, while the yen has become one of the worst-performing major currencies this month. Political shocks and trade tensions are the main sources of market pressure.

Analysts Warn of Downside Risks

Historical data shows that if the ruling party loses in elections, the market will face larger and longer adjustments. According to Toshiya Matsunami, chief analyst at Nissay Asset Management:

When the ruling party loses its majority, the market takes 35 to 75 days to bottom out, with an average total decline of about 8%. In contrast, if the ruling coalition wins, the Tokyo Stock Exchange index only needs about 15 days to bottom out.

Since the beginning of this month, the Tokyo Stock Exchange index has fallen 1.2% after three months of gains, as political uncertainty erodes investor confidence.

(Tokyo Stock Exchange index has weakened since July)

Additionally, Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank, warned that Japan's financial market could face a triple whammy of stocks, bonds, and currencies, posing a severe challenge to investors:

If far-right and far-left political parties gain strength, the yen, bonds, and stock markets will face the risk of a 'triple decline.'

Although the impact of the election results on the market may present a complex and nuanced situation, some analysts point out that a potential positive factor is that a weaker yen may benefit exporters harmed by U.S. tariffs, while the opposition's agenda to cut the food consumption tax could boost consumer stocks.

The Rise of Populism and the Prospects for Corporate Governance Reform

This election may also have a profound impact on one of the core drivers of Japan's stock market rise in recent years—corporate governance reform Tomochika Kitaoka, Chief Equity Strategist at Nomura Securities, pointed out:

The Liberal Democratic Party's choice of coalition partners may lead to a change in its stance on corporate governance. Investors seem to have overlooked this.

Dissatisfaction among Japanese voters with the ruling party is growing, which has helped new parties like the Sansei Party gain support in polls. This right-wing party is pushing for a "change in the economic model that excessively directs profits to shareholders." This somewhat highlights the rising trend of populism within Japan.

Shinichi Ichikawa, Senior Researcher at Baida Asset Management, stated:

As the economy shifts from deflation to inflation, the struggling populace is voicing their grievances, and we are witnessing the rise of populism that the West has experienced. Japan is no exception, and income redistribution will undoubtedly become a key theme in the future.

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk