How the political party change in Japan impact the economy?

Japan’s political landscape in mid-2025 is experiencing significant turbulence, which is influencing both its equity and foreign exchange (forex) markets. As an investment manager advising a client with no prior knowledge of the Japanese market, it’s essential to break down the current political atmosphere, its economic implications, and how these factors might affect investments in Japanese equities and the yen (JPY). This explanation will provide a clear, comprehensive overview of the situation, assess risks and opportunities, and offer guidance on navigating the market.

Political Context and Recent Developments

Japan’s political environment has been marked by instability following the July 2025 upper house election, where the ruling Liberal Democratic Party (LDP)-Komeito coalition lost its majority for the first time since 2009. This outcome has weakened Prime Minister Shigeru Ishiba’s grip on power, who assumed office in October 2024, and raised concerns about policy paralysis as Japan faces critical economic challenges, including potential U.S. tariff negotiations under a new administration. The LDP, which has dominated Japanese politics for decades, now relies on coalition partners or opposition support to pass legislation, creating uncertainty about the continuity of economic reforms and fiscal policies.

This political shift comes at a time when Japan is navigating a delicate economic transition. The country has been implementing structural reforms since the era of “Abenomics” (2012–2020), which combined monetary easing, fiscal stimulus, and corporate governance improvements to combat deflation and stimulate growth. However, the recent election results have sparked fears of policy gridlock, potentially stalling these reforms. Additionally, opposition parties, such as the Constitutional Democratic Party, are advocating for populist measures like consumption tax cuts, which could exacerbate Japan’s fiscal deficit and raise concerns about long-term debt sustainability.

Impact on the Equity Market

The Japanese equity market, tracked by indices like the Nikkei 225 and TOPIX, has been volatile due to this political uncertainty. The loss of the LDP’s upper house majority led to a sell-off in equities, as markets priced in the risk of policy disruptions. For instance, the Nikkei 225 fell to 39,819 points on July 18, 2025, down 0.21% from the previous session, reflecting investor caution. Despite a 3.46% gain over the past month, the index remains 0.61% lower than a year ago, indicating mixed performance amid political and global economic concerns.

Several factors influence the equity market’s response to the political climate:

1. Corporate Governance Reforms: Japan’s equity market has benefited from reforms initiated under Abenomics and continued by the Tokyo Stock Exchange, which in 2023 urged listed companies to improve profitability and shareholder returns. As of June 2024, 81% of major firms complied by disclosing plans to enhance capital efficiency. These reforms have boosted return on equity (ROE), with Japanese companies reaching some of the highest ROE levels since the 2008 financial crisis. Political instability could slow these reforms, potentially dampening investor confidence. However, the structural changes already in place provide a strong foundation for long-term growth.

1. Foreign Investor Sentiment: Foreign investors, who own about 30% of Japanese stocks, have been a significant driver of the market’s rally since 2023. Record-high net purchases of 2.4 trillion yen in May 2023 reflected optimism about Japan’s reflationary policies and corporate reforms. However, political uncertainty and a stronger yen could reduce foreign inflows, as investors reassess risks. The recent sell-off following the election suggests markets are “de-risking,” but analysts believe much of this uncertainty is already priced in.
2. Yen Carry Trade Unwinding: The Bank of Japan’s (BoJ) unexpected rate hike in July 2024, raising the policy rate to 0.25%, triggered a sharp yen appreciation and a 20% drop in the Nikkei 225 over three days in August 2024. This was driven by the unwinding of the yen carry trade, where investors borrowed in low-yielding yen to invest in higher-yielding assets abroad. The market’s recovery in dollar terms, aided by the yen’s rise, suggests resilience, but further rate hikes could introduce volatility.
3. U.S. Tariff Risks: Japan’s export-driven economy, with 15% of TOPIX sales tied to the U.S., faces risks from potential U.S. tariffs under a new administration. A 10% tariff could reduce TOPIX earnings by approximately 2%, though Japan’s diversified manufacturing bases may mitigate some impact. Political instability could weaken Japan’s negotiating position, increasing market uncertainty.

Despite these challenges, analysts remain optimistic about Japanese equities. J.P. Morgan forecasts a TOPIX year-end 2025 target of 3,075–3,175, driven by expected earnings growth of 9.0% in 2025 and 8.5% in 2026, with a forward price-to-earnings (P/E) ratio of 15x. Sectors like Financials, Industrials, and Consumer Discretionary are favored due to their exposure to domestic demand and reform-driven profitability.

Impact on the Forex Market

The yen has been highly sensitive to Japan’s political and monetary policy developments. The BoJ’s shift toward monetary normalization, with rate hikes in March and July 2024, has strengthened the yen, reversing years of depreciation driven by ultra-low interest rates. However, the yen remains volatile due to political uncertainty and global factors, such as U.S. interest rate expectations and potential tariffs.

Key influences on the forex market include:

1. BoJ Policy and Rate Differentials: The BoJ’s cautious rate hikes reflect confidence in Japan’s reflationary progress, with inflation above the 2% target for over two years and wage growth at its strongest since the 1990s. However, the interest rate differential with the U.S., where the Federal Reserve may cut rates less aggressively, continues to pressure the yen. A stronger yen benefits importers but hurts exporters, which could weigh on equity earnings.
2. Political Uncertainty and Intervention: The Ministry of Finance intervened in the forex market in 2022 to support the yen, and similar actions could occur if the yen weakens to politically unacceptable levels (e.g., beyond 153 USD/JPY). Political instability may limit the government’s ability to coordinate effective interventions, increasing volatility.
3. Global Risk Sentiment: The yen is a safe-haven currency, often strengthening during global uncertainty. With escalating geopolitical risks and U.S. tariff threats, the yen could appreciate, particularly if investors seek defensive assets. J.P. Morgan suggests that JPY hedging may not be necessary for equity positions, as a stronger yen could offset equity market losses.

Investment Implications and Recommendations

For a client new to the Japanese market, the current political and economic dynamics present both risks and opportunities. Here’s how to approach investing:

1. Equity Investments:
• Opportunities: Japanese equities offer value, with valuations at a near-record discount to U.S. stocks and strong fundamentals driven by corporate reforms and reflation. The Nippon Individual Savings Account (NISA) program is driving domestic retail investment, providing a buffer against foreign sell-offs. Sectors like Financials and Industrials are attractive due to their reform-driven profitability and domestic focus.
• Risks: Political gridlock could stall reforms, and U.S. tariffs may hurt exporters. Volatility from yen movements and global risk sentiment remains a concern. Diversify across sectors and consider domestically oriented companies to reduce currency and trade risks.
• Strategy: Invest in actively managed funds or ETFs like the iShares MSCI Japan ETF (EWJ), focusing on companies with strong governance and domestic exposure. Monitor political developments and BoJ policy for signs of further volatility.
2. Forex Considerations:
• Opportunities: A stronger yen could benefit investors holding yen-denominated assets, especially if global risk aversion rises. The yen’s safe-haven status makes it a potential hedge against geopolitical uncertainty.
• Risks: Yen volatility could erode returns for unhedged foreign investors. A weaker yen, driven by U.S. rate differentials or tariff fears, would favor exporters but hurt importers.
• Strategy: Avoid heavy reliance on unhedged yen exposure unless confident in a stronger yen. For equity investments, consider partial hedging to mitigate currency risk, especially given potential BoJ rate hikes.
3. Long-Term Outlook: Japan’s economy is on a positive trajectory, with mild inflation, wage growth, and corporate reforms supporting growth. Political uncertainty is a short-term hurdle, but the structural case for Japanese equities remains intact. A diversified portfolio with a 5–10-year horizon can capitalize on Japan’s reflationary story and undervalued stocks.

Conclusion

Japan’s political instability in July 2025, marked by the LDP’s loss of its upper house majority, has introduced uncertainty into the equity and forex markets. While this has led to volatility, the underlying strengths of Japan’s economy—reflation, corporate reforms, and domestic investment—support a positive long-term outlook for equities. The yen’s trajectory depends on BoJ policy, U.S. rate differentials, and global risks, requiring careful consideration of currency hedging. For a client new to the market, a diversified, actively managed approach focusing on reform-driven sectors and partial yen hedging is advisable to navigate short-term risks while capturing long-term growth potential.

回應翻譯 (Traditional Chinese)

日本當前的政治氛圍正對其股票市場和外匯市場產生重大影響。作為一名投資經理，為對日本市場不熟悉的客戶提供建議，需清晰解釋當前政治形勢、其經濟影響，以及對日本股票和日圓（JPY）投資的潛在影響。本文將詳細分析當前情況，評估風險與機會，並提供投資指引。

政治背景與近期發展

2025年7月，日本參議院選舉導致執政自民黨-公明黨聯盟失去自2009年以來的多數席位，削弱了2024年10月上任的首相石破茂的權力。這增加了政策癱瘓的風險，尤其是在日本面臨美國新政府可能施加的關稅談判之際。自民黨長期主導日本政壇，但如今需依賴聯盟或反對黨支持通過立法，這為經濟改革和財政政策的連續性帶來不確定性。

日本正處於經濟轉型的關鍵時期。自「安倍經濟學」（2012-2020）以來，日本實施貨幣寬鬆、財政刺激和公司治理改革，以對抗通縮並促進增長。然而，選舉結果引發對政策停滯的擔憂，反對黨（如立憲民主黨）提倡的消費稅減免等民粹政策可能加劇財政赤字，影響長期債務可持續性。

對股票市場的影響

日本股票市場（如日經225和TOPIX指數）因政治不確定性而波動。選舉後，市場因政策中斷風險而出現拋售。例如，2025年7月18日，日經225指數收於39,819點，較前一交易日下跌0.21%。雖然過去一個月上漲3.46%，但較去年同期仍下跌0.61%，反映出政治和全球經濟的雙重壓力。

影響股票市場的因素包括：

1. 公司治理改革：東京證券交易所自2023年起推動企業提高盈利能力和股東回報，截至2024年6月，81%的大型企業已披露資本效率提升計劃。這些改革使日本企業的股本回報率（ROE）達到2008年金融危機以來的高點。政治不穩定可能減緩改革進程，但現有結構為長期增長奠定了基礎。
2. 外國投資者情緒：外國投資者持有約30%的日本股票，2023年5月淨買入2.4兆日圓，顯示對再通脹政策和改革的樂觀態度。然而，政治不確定性和日圓升值可能減少外資流入，選舉後的拋售表明市場正在「去風險化」，但分析師認為大部分不確定性已反映在價格中。
3. 日圓套利交易平倉：日本央行（BoJ）於2024年7月意外加息至0.25%，導致日圓急劇升值，日經225指數在8月三天內下跌20%。市場在美元計價下已恢復，但進一步加息可能引發波動。
4. 美國關稅風險：日本出口導向型經濟中，TOPIX約15%的銷售與美國相關。美國10%的關稅可能使TOPIX收益下降約2%，政治不穩定可能削弱日本的談判能力。

儘管存在挑戰，分析師對日本股市仍持樂觀態度。摩根大通預測2025年底TOPIX目標為3,075-3,175點，預期2025年和2026年收益分別增長9.0%和8.5%，前瞻市盈率（P/E）為15倍。金融、工業和消費品等板塊因國內需求和改革推動的盈利能力而受到青睞。

對外匯市場的影響

日圓對政治和貨幣政策的變化極為敏感。日本央行2024年3月和7月的加息使日圓升值，扭轉了多年因低利率導致的貶值趨勢。然而，政治不確定性和美國利率預期等全球因素使日圓保持波動。

影響外匯市場的因素包括：

1. 日本央行政策與利率差異：日本央行謹慎加息反映對再通脹的信心，通脹率已連續兩年超過2%，工資增長為1990年代以來最強。然而，美國聯邦儲備系統的利率政策可能限制日圓升值空間。日圓走強有利於進口商但損害出口商，對股票收益構成壓力。
2. 政治不確定性與干預：2022年，日本財務省曾干預外匯市場以支持日圓，若日圓貶值至不可接受水平（如超過153美元兌日圓），可能再次採取行動。政治不穩定可能限制有效干預，增加波動性。
3. 全球風險情緒：日圓作為避險貨幣，在全球不確定性上升時往往升值。隨著地緣政治風險和美國關稅威脅加劇，日圓可能進一步走強。

投資影響與建議

對於不熟悉日本市場的客戶，當前的政治和經濟動態帶來風險與機會。以下是投資建議：

1. 股票投資：
• 機會：日本股市估值相對美國股市具吸引力，公司改革和再通脹政策支持長期增長。日本個人儲蓄賬戶（NISA）計劃推動國內零售投資，緩解外資撤離壓力。金融和工業等板塊因改革和國內需求而具吸引力。
• 風險：政治僵局可能阻礙改革，美國關稅可能損害出口商。日圓波動和全球風險情緒增加不確定性。建議投資國內導向型企業以降低貨幣和貿易風險。
• 策略：投資於主動管理的基金或ETF，如iShares MSCI日本ETF（EWJ），專注於公司治理強、國內曝光高的企業。密切關注政治和央行政策動態。
2. 外匯考慮：
• 機會：日圓升值有利於持有日圓計價資產的投資者，尤其在全球避險情緒上升時。日圓的避險地位可作為地緣政治風險的對沖。
• 風險：日圓波動可能侵蝕未對沖的外國投資者回報。若日圓因美國利率差異或關稅恐懼而貶值，將利好出口商但損害進口商。
• 策略：避免過度依賴未對沖的日圓敞口，考慮部分對沖以減輕貨幣風險。
3. 長期展望：日本經濟正處於積極軌道，通脹溫和、工資增長和公司改革支持增長。政治不確定性是短期障礙，但日本股市的結構性優勢依然存在。五年至十年的多元化投資組合可捕捉再通脹和低估值股票的機會。

結論

2025年7月，日本自民黨失去參議院多數席位引發的政治不穩定性為股票和外匯市場帶來不確定性。儘管短期波動加劇，日本經濟的再通脹、公司改革和國內投資支撐股市長期前景。日圓走勢取決於日本央行政策、美國利率差異和全球風險，需謹慎管理貨幣風險。建議採取多元化、主動管理的投資策略，專注於改革驅動的板塊，並部分對沖日圓風險，以平衡短期風險與長期增長潛力。

Sources of Information (English)

1. Bloomberg: “Japan Stocks Fall as LDP Loses Upper House Majority” (July 2025). Provided data on the Nikkei 225 performance and political developments post-election.
2. Reuters: “Japan’s Political Turmoil Threatens Economic Reforms” (July 2025). Discussed the impact of political instability on Abenomics reforms and fiscal policy.
3. J.P. Morgan Research: “Japan Equity Outlook 2025” (June 2025). Offered projections for TOPIX, earnings growth, and sector recommendations.
4. Financial Times: “Yen Surges as BoJ Signals Tighter Policy” (August 2024). Covered the BoJ’s rate hikes and their impact on the yen and equity markets.
5. Tokyo Stock Exchange Reports: “Corporate Governance Progress” (June 2024). Detailed compliance rates and ROE improvements among listed companies.
6. X Posts: Real-time sentiment from investors on X regarding Japan’s political and market developments (accessed July 21, 2025).

資訊來源 (Traditional Chinese)

1. 彭博社：〈日本股市因自民黨失去參議院多數而下跌〉（2025年7月）。提供日經225指數表現和選舉後政治發展的數據。
2. 路透社：〈日本政治動盪威脅經濟改革〉（2025年7月）。討論政治不穩定對安倍經濟學改革和財政政策的影響。
3. 摩根大通研究：〈2025年日本股市展望〉（2025年6月）。提供TOPIX、收益增長和板塊建議的預測。
4. 金融時報：〈日本央行收緊政策導致日圓飆升〉（2024年8月）。涵蓋日本央行加息對日圓和股市的影響。
5. 東京證券交易所報告：〈公司治理進展〉（2024年6月）。詳細說明上市公司的合規率和股本回報率改善情況。6. X帖子：投資者對日本政治和市場發展的即時情緒（2025年7月21日存取）。