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LIVE MARKETS-Upper House election a near-term risk for Japanese equities

ReutersJul 10, 2025 11:29 AM
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UPPER HOUSE ELECTION A NEAR-TERM RISK FOR JAPANESE EQUITIES

Japanese voters head to the polling booth on July 20 and polls are suggesting a new coalition framework, with a range of scenarios possible.

Citi believes the Upper House election is a near-term risk for Japanese stocks.

"When an Upper House election results in a change in the PM, concern about political instability tends to cause Japanese equities to weaken," Citi says.

"If the government suffers a big defeat at the Upper House election, there would be a high likelihood of a change in prime minister and this would be a short-term risk for Japanese equities."

Longer-term, the impact could depend on what the next ruling coalition looks like.

Under a Grand Coalition, where the Constitutional Democratic Party (CDP) joins the LDP and Komeito, Citi believes fiscal expenditure to counter inflation would be relatively small.

"There would be an increased likelihood of future tax rises due to a policy of fiscal consolidation, so it could be negative for Japanese equities on a somewhat longer timeline."

In a Conservative Coalition scenario, where one or more of the conservative parties (Democratic Party For the People, Japan Innovation Party, or Sanseito) joins the LDP and Komeito, there may be worries about Japan's fiscal stance.

"A rise in long-term interest rates due to concern about a near-term deterioration in Japan’s fiscal position would represent a risk of a correction in the valuations of Japanese equities," Citi says.

"However, if the BOJ and MOF were able to ease turmoil in the bond market, investors may rate the economic stimulus provided by a cut to the consumption tax etc. and Japanese equities therefore react positively."

(Samuel Indyk)

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