With two new parties shaking up Japan's political scene heading into the general election campaign, market watchers are uncertain what to expect after polls close on Oct. 22, though they are keen to find out the fate of the consumption tax hike and who will run the Bank of Japan (BOJ).
"The big market movements will happen after the election, so until then we will see how things unfold," one source in the financial markets commented.
The October 2019 consumption tax hike from 8 percent to 10 percent looks set to become the prime economic issue of the campaign, with parties differing on how to use the extra revenue and even whether the hike should happen at all.
"If the ruling parties win and the consumption tax goes up, international investors will value the improvement in Japan's government finances," said Shingo Ide, chief financial engineer at the Nissei Life Insurance Research Institute think tank. "If opposition parties calling for the hike to be frozen win, then the market will question whether they have a convincing argument for securing government revenue."
Nomura Securities Co. Senior Economist Masaki Kuwahara, however, pointed out that the ruling parties have recently promised to put some of the new tax revenue to making preschool education free, among other pledges, "so they're moving to increase expenditures just like the opposition parties.
"What the markets are most interested in is what the election results will mean for who leads the BOJ and the country's monetary policy," continued Kuwahara. Current BOJ governor Haruhiko Kuroda's term in office is set to expire in April next year.
When trading resumed on Tuesday, Oct. 10 after a long weekend layoff, the Nikkei Index rode optimism for both domestic and global economic recovery to close at 20,823.51, up 132.8 points from Friday's finish -- the Nikkei's highest close since July 2015.
Norihiro Fujito, director of investment research at Mitsubishi UFJ Morgan Stanley Securities Co., also credited the rosy election prospects of Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) for the rising tide.
"The market is optimistic that 'Abenomics' (the economic policies of Prime Minister Shinzo Abe) will continue, as the opposition's split has generated a three-way race and the ruling parties are thus unlikely to suffer a serious defeat," Fujito stated.
However, "with two new parties suddenly on the scene, this election is difficult to read," he continued. "If the Kake Educational Institution (favoritism) issue gets traction and the LDP loses its independent majority in the House of Representatives, the party could lose its ability to hold an administration together. And the shock of that may trigger a sudden drop in stock prices."
The head of one major bank pointed out that Tokyo Gov. Yuriko Koike's Party of Hope "could even team up with anti-Abe forces in the LDP after the election. It's impossible to predict what will happen."