Bank of Japan Governor Kazuo Ueda answers questions during the governors' talk on inflation and Japanese monetary policy at the International Monetary Fund (IMF) and the World Bank Group's fall 2024 meeting in Washington, US, October 23, 2024.
Kylie Greenlee Bell | Reuters
Japan's long-ruling Liberal Democratic Party may have suffered an election shock, but analysts said it was unlikely to deter the Bank of Japan from a course of rate hikes.
In Sunday's election, the LDP lost its majority in Japan's lower house of parliament for the first time since 2009. Along with its junior coalition partner Komeito, the LDP will need to work with other parties to form a government. It is also possible to have a minority government.
The result was a blow to the Liberal Democratic Party, David Bolling, director of Japan and Asian trade at the Eurasia Group, told CNBC's “Squawk Box Asia.”
“The LDP is bruised. They have black eyes and bloody noses, but they are still standing, and so is Ishiba, and they are still the largest party in the House of Representatives,” he said on Monday.
As such, the LDP will remain in the “driving seat” when it comes to forming a coalition government, which he said is good news.
Prime Minister Shigeru Ishiba indicated his intention to remain prime minister despite the loss, saying, “We will humbly and solemnly accept the harsh ruling,” according to a Google translation.
The LDP website also said in a statement that Ishiba also indicated his intention to maintain an LDP-centered government.
The political turmoil comes ahead of the Bank of Japan's meeting this week. Nearly 86% of economists polled by Reuters expect the central bank to leave interest rates unchanged when it announces its decision on Thursday.
The chances of the Bank of Japan raising interest rates this week are “probably close to zero,” said Izumi Devalier, chief Japanese economist at Bank of America.
When asked whether the election result could derail the Bank of Japan's rate hike cycle, Devalier explained that while political uncertainty and instability could delay rate hikes, she added that the Bank of Japan could not ignore continued weakness in the yen.
“I don’t think this necessarily means that the Bank of Japan will stop working for the foreseeable future. Obviously you have to monitor market developments, but we could still be on track to raise interest rates in January or even December, depending on what happens,” she said. Where does yen go?
Katsuhiko Aiba, an economist at City Bank, also expressed similar sentiments, writing in a note that “some believe that government instability would make raising interest rates difficult for the Bank of Japan, but this is by no means clear.” .
He adds: “We still see little possibility of the BOJ being diverted from the interest rate hike cycle by the government even after the lower house elections. However, we see a risk if Prime Minister Ishiba steps down and Sanae Takaishi becomes the new LDP leader.”
Takaishi recently lost the LDP election to current Prime Minister Shigeru Ishiba, and previously served as minister responsible for economic security. It supports monetary easing, and warned the Bank of Japan in September against raising interest rates.
Jesper Kohl, a senior director at Tokyo-based financial services firm Monex Group, told CNBC that the Bank of Japan will be more independent after the election and will pursue its goal of normalizing its monetary policy.
“Yes, desperate politicians will make bolder calls for BOJ action, but unlike Ishiba, BOJ Governor Ueda knows what he is doing and has the full support of the people,” he said.
Market effects
Monday morning, the indicator Nikki 225 It rose about 1.73%, topping the gains in Asian markets, while it rose yen It weakened to a three-month low, trading at 153.49. A weaker yen usually boosts Japanese stocks, which are heavily skewed towards exporters.
Bank of America's Devalier said the market moves could be a “knee-jerk” reaction and that investors will have to look to next week to see how markets play out.
Longer term, Monex Group's Cole remains bullish on Japan, saying: “Unlike the LDP leaders, Japan's CEOs get things done, focused on creating shareholder value and profitable investments.”
He expects corporate earnings and dividends to surprise on the upside over the next 12 to 15 months, growing 18% to 20% and lifting the Nikkei.
Back in July, Cole reiterated his forecast that the Nikkei would reach 55,000 by the end of 2025, driven by improving corporate earnings.
Likewise, Hirofumi Suzuki, chief foreign exchange market strategist at SMBC, said the formation of a coalition government is expected to boost stock prices while weakening the yen, as seen in Monday's trading.
He added that further depreciation of the yen could be a catalyst for raising interest rates, noting that SMBC Bank is monitoring the exchange rate.
