Ishiba Shigeru was supposed to be the savior a month ago. After scandals and public discontent forced his predecessor Fumio Kishida to resign, the plain-speaking backbencher was brought in to clean up the party and regain the public's trust. Now he faces the possibility of one of the shortest tenures of any Japanese prime minister in decades, Commerzbank’s FX analyst Volkmar Baur notes.

JPY is being pushed down by the political uncertainty

“His party and its long-time coalition partner, Komeito, have lost their majority in the lower house. It is unclear how the government will be formed in the coming weeks. In case of doubt, the election procedure is designed to allow a minority government to be formed – the prime minister-designate would only need a simple majority in the second round of voting. However, it is also unclear whether Ishiba will be forced to resign as a result of the disastrous election result for the LDP, and whether a coalition of opposition parties will be formed to form a majority without the LDP.”

“JPY has already weakened significantly against the US Dollar this morning and may continue to do so for the duration of the political uncertainty. A rate hike by the Bank of Japan at its meeting on Thursday now seems very unlikely, and political uncertainty in the US could be added to the mix next week. Potential policy decisions there, which could also affect Japan as an export nation, now face a political environment that makes strategic responses impossible.”

“In the medium term, however, a minority government or an unstable multi-party coalition could be cyclically positive for the JPY. Such a government would likely pursue populist policies, increase fiscal spending and postpone fiscal consolidation. In this case, the Bank of Japan may feel compelled to raise interest rates more aggressively.”