Japan markets may face some pressure after vote

By Charlotte Cooper, Chief Markets Correspondent

TOKYO (BestGrowthStock) – Japanese shares and government bonds may face initial selling pressure on Monday after the government lost an upper house election, a reverse that could thwart its ambitions to curb public debt.

Longer term, though, markets will eye which smaller parties the ruling Democratic Party allies with, what policy compromises it makes and whether that dilutes its fiscal reform hopes.

“JGBs may come under selling on the prospect of a delay in fiscal reform, and Japanese shares may also meet with selling on the political deadlock,” said Kyohei Morita, chief economist at Barclays Capital Japan.

“But such market reactions are likely to prove short-lived because no major policy change is taking place.”

Prime Minister Naoto Kan’s Democrats were set to win just 47 seats and its tiny coalition partner, the People’s New Party, none, losing their combined majority in parliament’s upper house, exit polls after the vote on Sunday showed.

Exit polls showed the Democrats far short of Kan’s goal of winning 54 seats, a result that leaves him vulnerable to a challenge from inside his own party.

BONDS FACE SELLING

Many analysts expected JGBs to come under some negative pressure, although the result could be complicated if stocks fall and investors opt for safe-haven bonds instead.

JGBs fell on Friday as investors hesitated to buy before the election and as stocks rose. The benchmark 10-year yield rose 1 basis point to 1.150 percent after hitting a seven-year low of 1.055 percent the previous week.

“The election results will give the impression that Japan may delay in proceeding with fiscal discipline, so the bond market is expected to face some selling pressure in its initial reaction … given the recent global focus on sovereign risk,” said Yoshimasa Maruyama, an economist at Itochu Corp.

Super-long bond yields, which led a recent flattening in the yield curve, might see the biggest reaction, said Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

Longer term, the issue would be which party the Democrats work with, although the global environment, with investors concerned about the strength of economic growth in the United States and China, could also be bond-supportive.

“The DPJ will have to compromise in its policies according to its coalition partner and will have difficulty in implementing economic policy,” Maruyama said.

But he noted that if that were the case, then the Bank of Japan may come under pressure to act to help the economy.

STOCKS SEEN FALLING

The benchmark Nikkei average rose 0.5 percent to 9,585.32 on Friday, when polls were already showing a risk the government could lose control of the upper house.

But after hitting a seven-month low early on, the average put on 4 percent for the week as pessimism about the global economy receded.

Analysts said shares might take the result negatively because Kan’s Democrats would not be able to enact their policies on their own, but the reaction was not likely to be big.

“I think stocks may have already factored in a lot of this on Friday morning, when there were a lot of predictions of the poor results,” said Masayoshi Okamoto, head of dealing at Jujiya Securities.

Longer term, the stock market reaction would depend on what coalition the Democrats ended up with.

“With the ‘Your Party’ in the coalition, there could be a lot of hopes for deregulation, which foreign investors really love,” Okamoto said, although the reformist Your Party ruled out on Sunday night any coalition deal.

YEN SELLING SEEN LIMITED

The yen could come under a little selling pressure initially but its reaction is likely to be limited and could quickly be swallowed up in any global forex market (Read more about the difference between the forex market and the stock market. ) move.

The yen fell against the dollar on Friday, slipping to 88.65 per dollar from about 88.30 the previous day as U.S. bond yields rose, and it lost ground last week as the euro rebounded in a short-covering rally.

(Editing by Rodney Joyce)

Japan markets may face some pressure after vote