Local time on the 28th, the distribution of all seats of the 50th House of Representatives election in Japan has been determined. The Liberal Democratic Party won 191 seats, Komeito won 24 seats, the ruling coalition of the two parties won a total of 215 seats, failing to reach the majority of 233 seats in the House of Representatives.

Statistics from Japan's public broadcaster NHK show that voter dissatisfaction with the money scandal has hit the support rate of the Liberal Democratic Party. Japanese Prime Minister Shizno Abe's adventurous call for an early election backfired, leading to the ruling coalition failing to win a majority in parliament for the first time since 2009, leaving Japan facing political instability.

The yen has fallen to a three-month low, with the dollar rising to 153.30 in early Monday trading, reaching its highest level since July 31. While a depreciation of the yen typically supports the Japanese stock market, investors are concerned that political instability will raise questions about Shinzo Abe's position. Nikkei 225 index futures traded in Chicago opened lower, indicating a potential drop of over 1% at the Tokyo market open.

This result has also raised doubts about Shinzo Abe's future personally. "We cannot eliminate the public's anger over political funding issues," Shinzo Abe said last Sunday before the latest results were announced. When asked if he would consider forming a coalition government with other parties, he stated that no decision had been made yet, but added that he would be willing to cooperate with other parties if there is policy agreement.

This result may also complicate the outlook for the Bank of Japan, which is trying to find the right time to raise interest rates again. The Bank of Japan is scheduled to hold a meeting on October 31, with expectations that it will temporarily maintain the interest rate. Nobuyasu Atago, Chief Economist at Rakuten Securities Economic Research Institute, expressed the biggest risk facing the Bank of Japan, which is the pressure from within the Liberal Democratic Party to replace Shinzo with another candidate supporting fiscal expansion could increase. "If this happens, it will be difficult for the Bank of Japan to continue raising rates."

So far, no other party has expressed willingness to join a coalition government to help the Liberal Democratic Party continue in power. The leaders of the third and fourth largest opposition parties have stated that they are unwilling to negotiate with the ruling coalition, but may cooperate on specific policy issues.

The biggest winner of this election is the Constitutional Democratic Party (CDP), whose seats increased significantly from 98 before the vote. The leader of the Democratic Party, Yoshihiko Noda, said that if the coalition government loses the majority of seats, he will seek to take over the government. The Liberal Democratic Party will still be the largest party in parliament, but the current challenge will be whether Shinzo Abe can find a path to a stable government. Negotiations for cooperation between parties may take weeks and there is no guarantee of a stable government.

KCM Trade's Chief Market Analyst Tim Waterer said, 'This may put the legislative process in a dilemma, at least in the short term, which may not be a good sign for the yen and the Nikkei index.'

Last month, Fumio Kishida took office as the leader of the Liberal Democratic Party, when the party was seeking to completely rid itself of scandals that damaged the support rate of former Prime Minister Fumio Kishida. He prohibited some scandal-involved members from running as Liberal Democratic Party candidates in the election to maintain his authority and regain public trust. This led to ten of them running as independent candidates, while two others who were dismissed are also running. He may now need their support to stay in power, even though many of them failed in the election.

"If we lose the majority, we will seek cooperation from as many people as possible," said LDP election manager Shinjiro Koizumi after the NHK exit poll. 'The LDP must make more thorough changes and rethink this harsh judgment.'

The fluctuations in policy positions, including his views on the normalizing path of the Bank of Japan's interest rates, have made Fumio Kishida's re-election efforts more challenging. 'The LDP seems to be losing the majority seats for the first time since 2009, indicating that apart from the impact of the bribery scandal, the policy implementation of the Kishida government is how bad,' said Rintaro Nishimura, Japan Affairs Assistant at The Asia Group consulting firm.

As the cost of cooperation, potential partners may make demands, making the challenges faced by Fumio Kishida even more difficult. 'For example, the Democratic Party is ideologically close to the LDP but hopes to halve the sales tax and increase the tax-exempt threshold. 'What can Kishida offer them if the LDP needs other parties?' Nishimura said. He added, 'Other parties may feel that helping a sinking ship is not worth it.'

The current situation facing the LDP is similar to the House of Representatives election in 1993 when the LDP lost the majority seats but remained the largest party in the parliament. After several weeks of negotiations, seven opposition parties formed a coalition government, ousting the LDP from power for the first time since 1955. The coalition government collapsed in less than a year, and the LDP returned to power.

Even if Fumio Kishida obtains enough support to continue as Prime Minister, the expected results would complicate his ability to achieve policy goals, such as increasing funding for regional growth, raising taxes to pay for increased defense spending. Losing the majority seats in the coalition government may prompt him to take more populist measures, such as increasing welfare spending and even cutting taxes.

"Opposition within the party strongly calls for expansionary fiscal policies and a reduction in consumption tax, so I believe the LDP may be pulled in that direction,' said Meiji Yasuda Research Institute economist Yuichi Kodama. 'If the supplementary budget includes generous subsidies for price reduction measures, it is likely to be too large in scale, postponing long-term issues such as fiscal consolidation.'

"In the short term, this situation is not favorable for the market," said James Salter, Founder and Chief Investment Officer of Zennor Asset Management. "The yen may further weaken, rekindling concerns about the 'carry trade' from August."

Meanwhile, since hitting a historic high in July, the Japanese stock market has been struggling. Gary Dugan, Chief Executive Officer of Global CIO Office, said, "The market is more hopeful that the current coalition government will win the election. International investors simply want to see the corporate sector continue on the path of restructuring without any political noise."

Daiwa Securities analyst Chiyo Takatori stated last week that defense stocks may take a hit as they had risen on expectations of Shigeru Ishiba increasing security spending.

However, Nicholas Smith, strategist at CLSA Securities Japan Co., pointed out that it should be remembered that initially Ishiba stated he intended to raise taxes. He said, "The weaker the Liberal Democratic Party gets, the harder it is for him to do so, which is advantageous for the market."

Editor/ping