“The movements in Japanese equities and the yen over the past week signal the need for the government and the central bank to maintain a delicate balance between boosting economic growth and keeping the public debt in check.”
- Japanese equities hit record levels, but the situation is still uncertain given political disagreements.
- We expect more clarity in the coming weeks as parties decide on their nomination for the PM.
- Further rapid weakening in yen could prompt the BoJ to hike interest rates in October, while a data-dependent approach suggests otherwise.
Japanese equities hit a new record in October following the election of pro-business Sanae Takaichi as the leader of Japan’s ruling political party (LDP). However, the dust hasn’t fully settled as the long-term coalition between LDP and its partner Komeito broke down on Friday. Markets were expecting that if confirmed as PM, Takaichi’s policies to increase government spending could boost the country’s economic growth. On the other hand, the yen weakened on worries that the push for higher spending could negatively affect the government’s financial situation.
On the economic front, while inflation is moderating, it remains above the BoJ’s target. Additionally, the Bank would like to stabilise the yen after its abrupt fall, and a rate hike in October may allow it to do that. The central bank will be monitoring the political situation and would like to minimise any damage to market sentiment from political uncertainty.
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