Can Japanese Stock Rally Carry Through Japan’s General Election?

Japanese Prime Minister Shinzo Abe’s decision to hold a snap election on October 22 could pay off for him and for investors in Japanese securities. Campaign trend meter data collected by GovBrain shows that Abe’s ruling Liberal Democratic Party is beating back a challenge from a new party led by the upstart, telegenic governor of Tokyo, Yuriko Koike.

GovBrain’s predictive data on Japanese securities across all asset classes finds that the bullish trend in stocks and the yen will continue to shine with a slowdown predicted for commodities and bonds.

But first, here is more on GovBrain’s analysis of Japan’s general election. To track elections, GovBrain uses a patent-pending “Trend Meter” inside its machine learning and artificial intelligence system. The GovBrain system searches data from nearly 800 government, regulatory, and legislative sources along with political, financial, and technology news sites from around the world.

Typically, Prime Minister Abe’s main opposition has been the Japanese Democratic Party. But many members of the Democratic Party are now running in different parties — underneath the banner of Koike’s Party of Hope or the more leftist Constitutional Democratic Party led by Yukio Edano. This has served to divide the opposition vote and give Abe the advantage before voting begins this Sunday.

GovBrain began tracking trend data on Abe’s Liberal Democratic Party and Yuriko Koike’s Party of Hope on September 29. Koike herself is not running for prime minister, but she expected her new party would deflate Abe’s candidacy.

At first the strategy appeared to work. The Party of Hope enjoyed a strong week of trend growth from October 3 to October 10. But the next week was different. From October 10 to October 16, the Party of Hope collapsed and showed flatline trend growth while the Abe’s Liberal Democrats maintained consistent, if not overwhelming, trend strength. Various polls are also predicting that Abe may have enough support to give him a large majority in the lower house, which would make him prime minister again, and perhaps even give his coalition a two-thirds super majority.

GovBrain projects Party of Hope to win at least 40 seats, but Koike’s faction will be disappointed that it limped into the last week without any momentum. The former TV news anchor was not actually running for prime minister, she preferred staying in the background. That reticence may have confused voters and cost her support from independents. Koike was also seen by some voters as not having clear command of the issues and not giving details on her campaign promises.

A big win for Abe should also be good for investors in Japanese securities. GovBrain Warning, our app that can predict financial crises, bubbles, and geopolitical risk, sees strength in Japanese stocks and the yen. GovBrain Warning is based on an aggregation of all our security price predictions and sentiment analysis from the last 3.5 years. Here is our year-to-date ratings for Japan. These ratings are based on 570 individual security price predictions this year.

Japan sentiment has been bullish across the board this year. The Nikkei 225 has risen 10.7% year-to-date and EWJ, the iShares MSCI Japan ETF, is up 17.1% over the year.

However, GovBrain’s bullish sentiment for Japan has cooled over the last 30 days. This is based on 46 individual security price predictions.

While the Liberal Democratic Party has remained strong and has outperformed the Party of Hope in the last two weeks, GovBrain Warning is still highly bullish on Japanese equities during that time. The Nikkei has been up 10 straight days and just finished at its highest level since 1996. Meanwhile, the yen has held steady against the U.S. dollar. GovBrain warns that Japanese bonds will be extremely bearish, even though the Japan 10-year Treasury has rallied since September 8.

An Abe election win with a large parliamentary mandate will be generally good for investors who have exposure to Japanese stocks and the yen. Markets tend to favor wins by established politicians who maintain the status quo. The fragmentation of the Japanese Democratic Party has helped Abe as voters seemed to be underwhelmed by the new Party of Hope and the Constitutional Democratic Party. A strong mandate for Abe after Sunday’s election should turn out well for investors.