“Expect yen weakness in the near-term”

David Clewell, associate portfolio manager for Multi-Asset Global Income at T. Rowe Price, shares his insights on the result of yesterday’s snap election in Japan, in which Prime Minister Sanae Takaichi won a historic two-thirds majority.

This result has been increasingly priced in by the market. There is a risk that longer-dated Japanese government bond (JGB) yields will increase unless Takaichi strongly pushes back on policies to reduce consumption taxes on domestic staples.

The Japanese yen (JPY): I expect weakness in the near-term and expect it is likely to be capped as the US Treasury is interested in a weaker US dollar against key global trading partners.

Japanese government bonds (JGBs): There is a risk yields are likely to increase, especially at the long-end, until there is clarity from Takaichi that consumption tax cuts have been pushed into the future.

Japanese equities: While initially positive due to the confirmed fiscal expansion, it may be volatile due to cross-asset impacts from JPY and JGB price movements.

Given the Liberal Democratic Party’s strength of decades, for multi‑asset investors, the central case for the snap election is less likely about a large policy pivot and more about the strength of the governing mandate. This should influence the speed and magnitude of policy actions by the government. The fiscal policy remains biased toward expansion.

From my perspective as a foreign investor, I see the long-term investment potential of Japanese equities due to improving growth dynamics, corporate reform, and reflation, which may support earnings growth. JGBs and the JPY are viewed as a short-term trading asset or a funding source given the current trends in Japan.

T. Rowe Price is a leading global asset management firm managing US$1.8 trillion.