Japan: Storm Calms or Reaches the eye?

The LDP and Japan Innovation Party have reached a broad agreement to form a coalition government and is expected to announce their co-operation soon. The LDP has also reached out to the DPP but their difference seems to be too large for an imminent alliance. The Japan Innovation Party, Ishin, is only asking for a reduction of seats in the Diet, Osaka to be considered as second capital and social security reform, which seems to be more acceptable for the LDP. 

This coalition will hold 231 out of 456 Lower House seat, three votes short of majority to carry Takaichi through but is sufficient for the run-off as it only considers the candidate with most votes. Takaichi has also met Sanseito, three seats in the Lower house, to try and gain their support. Unless the opposition parties conquered their difference and gather, Takaichi is almost guaranteed to be the next PM for Japan. 

Contrary to most beliefs, while we still consider Takaichi a believer of "Abenomics", the Japanese economy is different than the 2010s. The change in business price/wage setting behavior has begun and echoes with the last stage of "Abenomics" reform, thus the first two stages of massive stimulus are not necessarily to be repeated. If such reformative behavior accelerates, they could potentially be no fraction between the BoJ and new PM. Realistically, it is only fair to assume the change of price/wage setting behavior to be gradual because consumption behavior at higher prices is required for the transformation and we are only seeing moderate process in that aspect.

The market sentiment has shifted in the past week after Komeito announced their exit from their LDP coalition but we did not see major rate pricing change in a short run. Market participants have divided view between the next hike, given the political uncertainty. We continue to see a potential 25bps hike in 2025 but may only take rates to 1% in 2026 with a green light, to avoid a head-lock with the government.