Japan's ruling coalition between the LDP and Komeito has split after 26 years, raising major uncertainty over the political future of its new prime minister, Sanae Takaichi. Komeito's decision to withdraw was seen as a response to Takaichi's tough approach.
Market reactions were mixed, with the yen strengthening by as much as 0.5% to ¥152.38 on the news, while Japanese government bond yields were mixed. Investors are now assessing whether the split could change the direction of Japan's fiscal and monetary policies.
Analysts in Tokyo said that if Takaichi fails to win parliamentary support, a pro-tightening candidate would likely be the choice. However, many see that scenario as not yet dominant as the opposition parties remain divided.
Some market observers expect the LDP to re-form a coalition with the DPP, which also supports expansionary fiscal policies. This means the loose policy direction could still potentially continue.
While Japanese stocks may fall slightly if political uncertainty persists, analysts see renewed buying interest emerging, supported by structural factors such as corporate reforms, stable inflation and growth in the technology sector.
