Japanese Senate election poll warns of "political earthquake", 6.8 trillion USD Japanese stock market faces test

If, according to the pre-election polls, the forecast predicts that after this Sunday's Japanese Senate election, the Japanese stock market may continue to decline. The results of multiple local elections show that the ruling coalition may lose a majority of seats in this weekend's election, which is another blow to Prime Minister Shozo Abe, who unexpectedly lost a majority of seats in last year's House of Representatives election in October. Political concerns have already affected the market, with local stocks performing worse than the MSCI World Index this month. Toshiya Matsunami, chief analyst at Nikko Asset Management, said that when the ruling party loses a majority of seats, "the market needs 35 to 75 days to bottom out, with an average total decline of about 8% during this period." If the ruling party wins, the Tokyo stock index is expected to bottom out in about 15 days. While Shozo Abe's ruling Liberal Democratic Party coalition may still hold the largest number of seats in the Senate, the possibility of losing a majority of seats has raised concerns about whether the government can complete a trade agreement by the August 1 deadline. It also reflects a weakening of the government's control over finances. The main opposition parties are mainly campaigning around more expensive plans to lower the consumption tax. This has had an impact on the Japanese bond market. On Tuesday, the yield on 10-year Japanese government bonds reached a 17-year high. Due to political turmoil and trade disputes, the yen has been one of the worst-performing major currencies this month. After rising for three months, the Nikkei index fell by 1.2% in July. A potentially weaker minority government could further complicate trade negotiations with the United States and disrupt investor sentiment in the market. Trump increased the tariff rate on Japan from 24% to 25% at the beginning of April. These tariffs do not include industry-specific tariffs - a 25% tariff on cars and car parts, and a 50% tariff on steel and aluminum. These car tariffs have already affected Japan's exports and increased the risk of a technical economic recession. Some analysts suggest that this election could also impact corporate governance reforms in Japan. Corporate governance reform has been an important driver of the rise in the Japanese stock market in recent years. Nomura Securities' chief equity strategist Tomochika Kitaoka said, "There may be changes in corporate governance policy depending on which parties the Liberal Democratic Party forms alliances with. Investors do not seem to be paying attention to this." Public dissatisfaction with the current system is growing, a sentiment that has not been fully reflected in Japan before. New forces like the populist conservative group Sanseito have gained some support in opinion polls as a result. Right-wing parties are pushing for "changing the existing economic model to better distribute profits to shareholders." Shinichi Ichikawa, a senior researcher at Pictet Asset Management Japan, said, "As the economy shifts from deflation to inflation, those who have struggled to make ends meet are beginning to complain, and we see the spread of the populist sentiment experienced in the West in Japan as well. Income redistribution will undoubtedly become an important theme in the future." It should be noted that the impact of this vote on Japan's $6.8 trillion stock market may be complex. Export companies heavily impacted by U.S. tariffs may benefit from the depreciation of the yen, while consumer stocks may rise due to the opposition party's plan to lower the sales tax on food. Sumitomo Mitsui, market strategist at Sumitomo Mitsui Trust Bank, said, "If far-right and far-left political forces strengthen, the yen, bonds, and stocks may face a 'triple decline' situation."