Rupture of ruling coalition causes political instability, market participants expect increased volatility in Japanese stocks, bonds, and exchange rates.

On October 10th local time, it was reported that the leader of the Komeito Party in Japan, Tetsuo Saito, conveyed his intention to leave the ruling coalition framework to the newly appointed leader of the Liberal Democratic Party, Sanae Takaichi. Senior officials in the Komeito Party have also confirmed that the party will leave the coalition with the Liberal Democratic Party. The imminent breakup of the coalition that has been in power for nearly a quarter of a century is a major blow to Takaichi Sanae, who has not yet formally assumed the role of prime minister, and has also raised concerns about the future policy direction of the Japanese government. It was reported that the meeting between Takaichi Sanae and Tetsuo Saito failed to reach an agreement on political party funding rules. Tetsuo Saito subsequently stated clearly that if no coalition agreement is reached, the Komeito Party will not vote to support Takaichi Sanae in the upcoming prime ministerial election in the next few days. Some analysts believe that despite losing the support of the Komeito Party, Takaichi Sanae is likely to still become the next prime minister as the Liberal Democratic Party remains the largest force in both houses of the Japanese parliament. However, the termination of this cooperation will bring great uncertainty to Japan's future political and legislative agenda. Without the support of the Komeito Party, the Takaichi Sanae government will face "greater difficulties" in pushing through budget proposals and various bills in the parliament. The rupture of the ruling coalition between the Liberal Democratic Party and the Komeito Party has led to a reversal in the so-called "Takaichi trade" in recent days, with the yen experiencing sharp fluctuations within a relatively narrow range, and the Nikkei 225 index futures falling in response. Many market professionals anticipate more volatility in the yen, Japanese government bonds, and the Japanese stock market in the current climate of political uncertainty. Below are the views of several market professionals on the future trends of various Japanese assets. Chidu Narayanan, Chief Strategist at a Bank in Asia Pacific, stated: "The increased political turmoil in Japan may put pressure on Japanese assets. The Komeito Party's withdrawal increases the possibility of larger-scale fiscal expansion, which will put downward pressure on Japanese government bonds and the yen." He added, "I believe that the yen's rebound will be brief and unsustainable, and in an environment of uncertainty, the yen and related assets are more likely to see selling pressure. Additionally, given the rising political and policy uncertainty, the Bank of Japan may adopt a wait-and-see approach in October, waiting for a clearer picture." Rieko Otsuka, Strategist at MCP Asset Management Japan, stated: "Since Takaichi Sanae was elected as the leader of the Liberal Democratic Party, the Japanese stock market has risen on expectations of a large-scale stimulus plan, some of which may now be reversed. With the ongoing US government shutdown and multiple negative factors, the Nikkei 225 index may fall to the 45,000 level." "The policies advocated by Takaichi Sanae may be more difficult to push through in parliament, and in the worst case scenario, she may not even be formally appointed as prime minister - the market may have begun to digest this risk scenario." Hiroyuki Ueno, Chief Strategist at Sumitomo Mitsui Trust Asset Management, stated: "Generally, political instability is unfavorable for the national currency. However, in this case, as the market had previously sold the yen in anticipation of Takaichi Sanae implementing a loose monetary policy, there may now be some partial rebound. Similarly, Japanese government bonds will be repurchased, and the stock market will fall." He added, "I believe that the Liberal Democratic Party may try to contact other parties, even if it does not form a formal alliance in the short term. The future government will be more fragile, which also means that the possibility of another election is increasing." "In this political chaos, the Bank of Japan may find it difficult to raise interest rates. Its next rate hike may be until December or January of next year." Homin Lee, Senior Macro Strategist at Lombard Odier, stated: "We expect Japanese government bonds to experience volatility when the market reopens next week, reflecting concerns about fiscal policy in a more unstable political environment. At the same time, as the market reassesses the dovish impact of Takaichi Sanae on the Bank of Japan's policy, the yen may experience a slight rebound." He also pointed out, "However, it should be noted that the opposition camp in Japan remains highly divided and unable to present a clear economic policy direction, which means it cannot provide clear guidance to foreign exchange, bond, and stock market investors. Although the combination of fiscal expansion and tightening monetary policy will not change our view that the Japanese stock market has a 'micro-driven fundamental stability,' we still maintain a positive outlook on the Japanese stock market. However, until the parties clarify the governance framework, the market may enter a period of uncertainty." Christopher Wong, Foreign Exchange Strategist at Overseas Chinese Bank, stated: "Earlier this week, the yen's decline was attributed to market expectations of loose policies from the incoming Prime Minister Takaichi Sanae, while the market postponed expectations for the Bank of Japan's interest rate normalization process. However, now that the Liberal Democratic Party has lost its long-term ally, the Komeito Party, it means that Takaichi Sanae may not be able to swiftly implement some policies, and the previous depreciation of the yen may be reversed. In the short term, the yen may rebound to around 1 dollar to 151.60 or 151 yen, and this trend cannot be ruled out." Pelham Smithers, Managing Director of Pelham Smithers Associates, stated: "I believe that today's market decline reflects concerns about this event, and there may be further selling in the future. Unless the Liberal Democratic Party can reach a new alliance with other parties in the next few days, the market is expected to further decline on Tuesday next week." Rajeev De Mello, Global Macro Investment Portfolio Manager at Gama Asset Management, stated: "This new political uncertainty will put pressure on the Japanese stock market. The Liberal Democratic Party may have to make some policy concessions, which could weaken the economic policy influence of probable Prime Minister Takaichi Sanae." "I still see long-term potential in the Japanese stock market, but there may be a certain degree of correction in the market in the short term until the leadership situation becomes clearer."