* According to the first estimate by the NHK, the Japanese national broadcast, immediately after the vote closed at 20.00pm local time, the LDP headed by Prime Minister Shinzo Abe is thought to have gained 253-300 out of 465 seats in the Lower House, while the ruling coalition coupled with the Komei party would have reportedly gained 281-336. Reportedly, the voting rate was very low partly due to the unseasonal typhoon and VERY bad weather and worked in favour more or less for the ruling parties which have the solid power base.
* Although the seats held by the coalition could decrease somewhat from 319 seats previously, such an achievement is likely to be viewed as the victory by the Prime Minister who has set the victory/defeat bar at the simple majority (233) by the coalition. It’s highly likely PM Abe will maintain his government, and the chance of his term as LDP chief to be extended until 2021 could even increase if the seats gained by the coalition exceed the two-thirds majority (310).
* As we discussed, the MOST important point of this election is that PM Abe has stated to raise the consumption tax in 2019 as scheduled in order to finance social welfare programmes, including wider availability of tuition-free education. The prime minister appears intent on introducing more stimulatory fiscal measures to ensure the next tax increase does not result in an economic slowdown like the 2014 tax hike. This is expected to facilitate JPY weakening in the medium and long term through strengthening the Japanese stock market as well as deteriorating Japan’s trade balance.
* As the USD/JPY risk reversal that shrank or narrowed its negative skew late last week indicates, downside protections that had been organized previously were mostly unwound, so the victory by PM Abe, which was broadly expected, will NOT boost USD/JPY straight away on Monday morning (closed on Friday at 113.52). Also, the Japanese stock market, which has rallied 3.0% or more this month, looks stretched and has a short-term risk of adjustments.
* However, given the fiscal policy change toward more stimulatory as well as the recent solidness in the US equity markets, such potential adjustments in USD/JPY and Nikkei stocks would be short-lived and provide an opportunity to continue to build long positions. We expect the pair could break the 114.00 resistance before the end of this year and climb up to the 118.00 high or above in the next 6 months.