• Japan's ruling coalition lost its majority in the House of Representatives, causing the yen to drop to a three-month low.
• The election results have raised concerns about future rate rises and potential political instability.
• The political shift has impacted the global economy, with the dollar pushing higher due to signs of strength in the U.S. economy.
• The current situation in Japan is reminiscent of the 2009 period of political instability and economic uncertainty.

In a significant political shift, Japan's ruling coalition, led by the Liberal Democratic Party (LDP) and its junior partner Komeito, lost its majority in the House of Representatives in the elections held on Sunday.

This is the first time since 2009 that the ruling coalition has lost its majority, leaving no party with a clear mandate to lead the world's fourth-largest economy. The loss has left the government in flux, and the uncertainty sent the yen currency to a three-month low.

The yen dropped 1% to 153.84 per dollar and by a similar margin against the euro to 165.87, on both counts its weakest since late July. The election results have raised concerns about future rate rises and potential political instability. The LDP and Komeito won 215 lower house seats, falling short of the 233 majority. This shortfall is likely to result in a period of wrangling to secure a coalition.

Traders have expressed concerns that the election outcome could result in a government without the political capital to preside over rising rates. This could potentially usher in another era of revolving-door leadership, a situation Japan has experienced before with four different prime ministers in a little over four years.

Market Reactions and Future Predictions

Bart Wakabayashi, Tokyo branch manager at State Street, expressed concern about the political instability, stating, It's one more thing for them to consider when they should be looking at the economy. Are we going to have another series of prime ministers every 10-12 months? That would not be good for the yen.

Analysts at BNY have predicted that the next immediate target for dollar/yen would be 155, with 160 being a likely line in the sand that would draw intervention from the finance ministry.

The election results have also had an impact on the stock market. Japanese stocks rose strongly on Monday as the yen careened to a three-month low. The Nikkei share average rose 1.45% to 38,463.50 as of the midday recess, and was earlier up nearly 2%. It opened 0.4% lower. The yen accelerated declines throughout the session, slumping as far as 153.885 per dollar for the first time since July 31. It was changing hands about 0.8% weaker at 153.60 per dollar as of 0230 GMT.

The election outcome may force parties into fractious power-sharing deals to rule, potentially ushering in political instability. Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management, stated, The result of the election itself is a negative for the stock market, without a doubt, because of the rise in political uncertainty. However, the rally is partly on the fact that this big risk event is now behind us, so there's a sense of relief. That and the weaker yen.

Global Impact and Historical Precedents

The political shift in Japan has also had an impact on the global economy. The dollar was pushing higher and on course for its largest monthly rise in 2-1/2 years as signs of strength in the U.S. economy and bets on Donald Trump winning the presidency lifted U.S. yields. At $1.0791, the euro was steady on Monday but down more than 3% on the month. Sterling bought $1.2952 and a 3.1% drop through October so far. Ten-year Treasury yields are up 40 basis points for October against a rise of 16 bps for 10-year bunds and 23 bps for gilts.

The political uncertainty in Japan and the weakening yen have historical precedents. In 2009, the Democratic Party of Japan (DPJ) won a landslide victory in the general election, ending more than 50 years of almost uninterrupted rule by the LDP. The yen weakened in the aftermath of the election, reflecting investor concerns about the DPJ's economic policies. However, the DPJ's rule was short-lived, and the LDP returned to power in 2012. The current situation in Japan is reminiscent of this period of political instability and economic uncertainty.

The situation is being closely watched by investors and analysts, who are concerned about the potential impact on the global economy. The historical precedents and current market reactions underline the importance of political stability for economic growth and investor confidence.