UBS weighs in on Japanese stock, yen positioning after elections

Investing.com– Japanese stocks rallied, while the yen weakened after Japan’s ruling coalition lost its parliamentary majority in a recent election, with UBS flagging increased near-term volatility in local markets. 

UBS said short-term moves in the yen were still too close to call, and that more direction would only become apparent after local political uncertainty clears. UBS also noted that the U.S. presidential elections would be a key point of uncertainty for investors. 

Japan now enters a 30-day period where the ruling Liberal Democratic Party and its opposition will seek alliances to form a new government.

UBS said political uncertainty and volatility was likely to persist in this period, and recommended increasing exposure to domestic sectors to help offset volatility in the yen. 

UBS said its base case still remained that ongoing corporate governance reforms in Japan and resilience in the economy on improved private consumption presented a strong medium-term outlook for local markets. 

On the monetary policy front, UBS said the Bank of Japan was still expected to raise interest rates later this year, although it could face increased political resistance to more hikes in the longer term. Both the LDP and its opposition have spoken against more rate hikes in the near-term. 

The BOJ concludes a two-day meeting on Thursday, and is widely expected to keep rates steady. UBS expects a 25 basis point hike in December, putting benchmark short-term rates at 0.5% after two hikes earlier this year. 

“We expect more near-term cross-asset volatility until there is a new Japanese government and the US election is settled. In the interim, we caution investors against chasing the USDJPY higher… as for Japanese equities, we continue to recommend a neutral allocation in globally diversified portfolios of around 5%,” UBS analysts wrote in a note. 

Japan’s Nikkei 225 and TOPIX indexes rose sharply this week after the results of the election, as investors welcomed the prospect of increased fiscal support and loose monetary policy due to a fractured political outlook.

The yen weakened substantially, with the USDJPY pair rising to a three-month high of near 154 yen.