Japan's Ruling Coalition Faces Loss of Majority - Implications for Markets and Politics

Japan's Governing Coalition Set to Lose Majority in Unprecedented Election Outcome In an unexpected development, Japan’s ruling Liberal Democratic Party (LDP) and its coalition partner are predicted to lose their majority in the upcoming Sunday election, as per a forecast by public broadcaster NHK. This raises questions about the future of Prime Minister Shigeru Ishiba.

Why is the Ruling Coalition Losing Majority?

The LDP and Komeito are likely to fall short of the 233 seats required for a majority in the lower house of parliament due to voter dissatisfaction over a slush-fund scandal and Japan's worst inflation in generations, according to NHK's forecast. Ishiba had hoped to secure a majority with his coalition partner, acknowledging that the LDP would not retain the 247 seats it held prior to the election. If the predictions hold true, this would be the first time the LDP has lost a coalition majority in an election since 2009.

Public Anger Over Political Funds Issue

The LDP's public support plummeted following revelations last year that party members were secretly enriching themselves with funds from supporters. Consequently, nearly every pre-election poll suggested the LDP would lose seats and possibly its majority with Komeito due to the scandal. Ishiba admitted on Sunday that they were unable to quell public anger over the political funds issue. He remained non-committal about forming a coalition with other parties, stating that no decisions had been made yet, but he was open to cooperation if their policies align.

Early Vote Count and Opposition Reaction

The early vote count shows the LDP and Komeito with a combined 145 seats, according to NHK. The main opposition Constitutional Democratic Party of Japan has 112 seats. CDP leader Yoshihiko Noda expressed his intention to take over the government if the coalition loses its majority.

Impact on Markets

Tim Waterer, Sydney-based chief market analyst at KCM Trade, warned that if the LDP does indeed lose its majority powers, it could create a legislative quagmire, which may negatively impact the yen and the Nikkei in the short term.

What Does This Mean for Japan's Markets?

Ippei Yamaura, a Goldman Japan FICC trader, suggested that the bottom line is negative for Japan equities. He believes that while positioning looks good, investors are overly optimistic about getting help from the DPP and/or Ishin.

Expected Market Reaction

Yamaura anticipates that the Nikkei will drop on Monday and end down by approximately 2%, less than what the option market indicated last Friday. He believes that the selloff will continue for a week or so as investors realize that it will be difficult for the LDP to get support from the DPP and/or Ishin.

Is This Outcome Surprising?

Although the outcome is not a massive surprise, it was not fully priced in. After Asahi reported the possibility of the LDP+Komei losing the majority, the market began to price it in through selling equities.

What Will Happen Now?

Prime Minister Ishiba must hold a special diet session by Nov 26 and appoint the new prime minister. The new prime minister will need to get nomination from both the upper house and lower house. However, as the LDP+Komei lose their majority in the lower house, they cannot nominate the new prime minister without cooperation from some lower house members outside of LDP+Komei.

What Will Happen if LDP+Komei Cannot Get Help from Anyone?

In such a scenario, Ishiba may be forced to form a "Minority government". This means he would need to manage a cabinet without support from parliament. In order to get nomination from the lower house, he may need to make many concessions and get support from some opposition parties.

What are Other Things to Watch?

The supplemental budget should be a significant focus. Ishiba previously said he would form a supplemental budget of JPY13 trillion or more. LDP may want to form as big a budget as possible to recover popularity. But opposition parties may try to limit it.

What Does the Positioning Look Like Now?

Overall, the positioning looks positive. CTAs are flat to slightly negative. Long/Short investors have not come back yet since the big selloff in early Aug. Long onlys are positive. Retail is not bad.

Bottom Line

In conclusion, the potential loss of majority by Japan's ruling coalition could have significant implications on the country's political landscape and its financial markets. It remains to be seen how these developments will unfold and what their long-term impact will be. What are your thoughts on this? Feel free to share this article with your friends and discuss. You can also sign up for the Daily Briefing, which is available every day at 6pm.