(Bloomberg) -- The shock loss of the majority for Japan’s ruling coalition is making bankers in Tokyo worried about the new government’s commitment to revitalizing financial markets including a push to boost its presence in asset management.
A disastrous showing for the Liberal Democratic Party and the Komeito Party at lower house elections over the weekend was casting doubts about a pledge to make Japan a “leading asset management center.” That had been a “positive factor” for the Japanese stock market, with clear appeal to overseas investors, said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co. The market will likely adopt a wait-and-see attitude to see whether the policy will be continued, he said.
The election results are a reminder that as Japan emerges from years of deflation and seeks to jump-start its financial sector, it faces many challenges including a massive debt load that’s more than twice the size of its economic output.
The LDP is dealing with a similar situation as during the lower house election in 1993, when it lost its majority but remained the largest party in parliament. It will likely need to work together with smaller parties with different policy goals, at a time when the main opposition Constitutional Democratic Party of Japan is proposing policies including an overhaul of the tax system to improve the nation’s fiscal health.
There likely won’t be major policy changes, but in the market “there’s a risk that caution will increase because the Constitutional Democratic Party has mentioned financial income taxation and tax increases,” Ichikawa said.
Read: What’s Next After Japan Ruling Party’s Election Blow: QuickTake
That said, for Hironari Nozaki, a professor at Toyo University in Tokyo, “the policy objective of enhancing labor income and asset income is in line with the thinking of conservative opposition parties such as the Japan Innovation Party and the Democratic Party for the People,” and there likely won’t be much impact on the financial sector even in the short term, he said.
In Japan’s equity market Monday the broad Topix index dipped at the start of trading but quickly reversed course to close 1.5% higher. In the financial sector, securities stocks outperformed the Topix, while a banking sector index ended higher even as some lender shares fell.
The yen dropped about 0.6% to 153.18 per dollar as of 6 p.m. in Tokyo after earlier weakening as much as 1% in reaction to the election results.
For financial firms, the slide in the Japanese currency is “other things being equal, positive for profits and for their share prices,” said Michael Makdad, a senior analyst at Morningstar Inc. He also said that “improvements in corporate governance in Japan have enough of a societal consensus that I don’t expect much impact from the political uncertainty.”
One risk scenario for financial markets is if internal division within the LDP obstructs the new administration’s ability to govern, said Toyo University’s Nozaki. But there’s plenty of scope for the LDP and Komeito to work together with smaller parties on individual policies, “so we can expect the government to be managed with sound discipline,” he said.
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