The Japanese elections are coming up, which could raise volatility in the yen and Japanese stocks, as the ruling Liberal Democratic Party (LDP) is set to lose its majority in the lower house of parliament for the first time since 2009. The October 27 elections come after a turbulent period in which Ishiba’s nomination and rhetoric surrounding the Bank of Japan’s interest rate hikes rocked the yen and sent stocks lower. If the coalition loses its majority and forms a minority government, Ishiba’s administration will be severely weakened, which could directly disrupt the politician’s recent, relatively dovish comments on Japan’s monetary policy. On the other hand, this does not mean that other politicians will diverge significantly from Ishiba’s current stance.
In the event of a change of government, it is unclear which party will take the lead in monetary policy, as it will be a coalition government. In theory, the market does not like changes in power, but at the same time, it is difficult to say what could happen to the yen following a potential defeat of the LDP. The Bank of Japan is of course an independent bank, but for several years there has been some influence from the authorities on the bank's decision, which has grown quite clearly in the last few years.
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Create account Try a demo Download mobile app Download mobile appAt this point, it is difficult to say what final impact the elections will have on the yen and companies included in the Nikkei index. One thing is certain, however, the next few sessions may bring a jump in volatility on these instruments, which is also suggested by the volatility implied by options on the USDJPY pair, which has reached its highest values since September this year.
The Nikkei index, represented by JP225, is currently trading in the lower limit structure of the growth channel, which has been observed on the index since August this year. It seems that the elections will decide whether JP225 will extend the general wave of growth or break below the structure and break the growth trend. It is worth watching closely how the market will react to the weekend elections in Japan. Source: xStation
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