On October 27th, Japan held an election that was detrimental to the efficacy of the ruling coalition of the Liberal Democratic Party (LDP) and Komeito.
The coalition lost their majority in the lower house, something that hasn’t happened since 2009.
Opinions on what this development holds for Japan’s markets are varied and numerous, with the below curated opinions offering both bullish (minority) and bearish (majority)viewpoints.
Aspects to watch moving forward regarding the Japanese residential real estate market, as extrapolated from the below macro-opinions are:
Wage growth in an inflationary environment with a falling yen – can real wages pull ahead of cost-push inflation thereby sustaining buyer demand now that the ruling coalition needs to work together with previously ignored parties to get any legislation passed?
Will the Bank of Japan (BOJ) raise rates or hold steady? Consensus seems to be hold steady which will have no impact on mortgage rates but the BOJ surprised markets in August by raising rates and could do so again.
Will a bearish yen continue to attract foreign buyers to Japanese real estate if the yen falls further to the USD due?
The short answer to all the above – no one knows, and time will tell.
How Japan Got Here?
France 24 economic analyst Charles Pellegrin gives an overview. Key points below the embed.
Key Takeaways:
Japan's Snap Election Impact: Ruling coalition led by the Liberal Democratic Party (LDP) lost its majority for the first time since 2009, raising political uncertainty.
Leadership Challenges: Prime Minister Shigeru Ishiba faces questions about his future after recent scandals and rising living costs impacted voter sentiment.
Inflation Concerns: Japan, heavily reliant on energy imports, saw inflation peak at 4.3% in January 2023, though it slowed to 2.5% by September.
Yen and Stock Market Reaction: The yen weakened, benefiting Japan's exporters, while high prices for imported goods, particularly energy, continue to affect consumers.
Monetary Policy Tensions: The Bank of Japan’s rate hikes to counter inflation and yen weakening face criticism, especially from smaller businesses impacted by higher borrowing costs.
Future of Rate Hikes: Although rates may remain unchanged this week, further increases are expected in the new year, potentially straining economic activity.
Bullish View – Expect Yen to Strengthen in 2025
Jayati Bharadwaj from TD Securities explains why she is a long-term yen bull. Key points below the embed.
Key Takeaways:
Political and Economic Pressures: Japan's ruling party faced weak polling partly due to cost-of-living pressures and a weak yen.
Long-term Yen Outlook: Despite near-term challenges, analysts expect the yen to strengthen over the medium term, with a target moving toward 140 against the dollar in 2025.
Inflation and Wage Growth: Tokyo and national inflation, along with wage growth, have been strong, prompting more calls for fiscal expansion.
Bank of Japan's Role: BOJ is likely to maintain a rate-hiking path, which, combined with fiscal measures, could support yen appreciation.
Analyst Sentiment: While caution is advised in the short term, a bullish stance on the yen is anticipated for the long term.
Bearish View – Japan’s Economy is Weak Says Former BOJ Board Member
Sayuri Shirai, a former BOJ board member, discusses Japan's currency and economic policies. Key points below the embed.
Key Takeaways:
Overlooked Yen Depreciation: Political parties failed to address the weakening yen's impact on rising living costs, focusing instead on subsidies for low-income groups.
Cost-Push Inflation: Inflation in Japan, around 2.5%, is largely driven by food and energy costs, affected by the weak yen.
BOJ’s Dilemma: Although a rate hike could counter the yen’s depreciation, Japan's weak economy makes this move challenging.
SMEs and Yen Weakness: Small and medium-sized enterprises (SMEs), crucial to Japan's economy, are increasingly concerned as the yen approaches dangerously low levels against the dollar.
Political Reluctance: Despite the need for potential intervention, there’s reluctance due to fears of stock market decline and Japan's sluggish economic condition.
Bearish View – Ishiba Needs to Go Says David Roche
David Roche, strategist at Quantum Strategy, gives a somewhat chilling vision of things to come. Key points below the embed.
Key Takeaways:
Political Uncertainty: Following election results, Japan faces a period of coalition-building with the possibility of a weak government led by either the LDP or the Constitutional Democratic Party.
Weak Government, Weak Yen: A weak coalition government is expected to avoid tightening monetary policy, pressure the BOJ to maintain loose policies, and pursue fiscal stimulus to gain voter support, leading to a weaker yen.
Market Reaction: Markets view this situation as positive for Japanese equities, as a weak yen benefits exporters; however, bond yields are rising due to expectations of increased fiscal spending.
Central Bank Independence: Roche suggests that central bank independence worldwide, including the BOJ, may wane under pressure from populist governments.
Equity Strategy: Roche is cautious about Japanese equities, stating that the recent rally relies more on weak government policies and yen depreciation than on fundamental company performance, which he finds unsound.
