What Japan’s Political Uncertainty Means for Its Market Rally

The steady course of the Japanese economy and business environment that has helped attract a torrent of investment in the past two years could be undercut by the political turmoil resulting from the country’s parliamentary elections on Sunday.

Japan’s economy, though not growing by leaps and bounds, has inched back from the disruptions of the Covid-19 pandemic. The emergence of long-sought inflation has given the Bank of Japan room to raise interest rates for the first time in nearly two decades.

Following moves by Warren Buffett last year to increase his holdings in some of Japan’s biggest trading firms, investors have shifted their money to Japan from China, which has economic and geopolitical risks. Corporate earnings in Japan have remained solid and government-led changes, such as guidelines recommending takeover offers be given serious consideration, have prompted companies to take steps to enhance their appeal to investors.

Stocks in Japan have experienced one of their strongest rallies in decades. The benchmark Nikkei 225 index is up nearly 50 percent since the beginning of 2023.

Now, the Liberal Democrats — the political party that has governed Japan for all but four years since 1955 — has lost its majority in the powerful lower chamber of Parliament, leaving the future structure of the government and direction of its economic policies uncertain.

“The reasons that Warren Buffett and others got excited about Japan are not lost, but you need the background that is a stable macro environment,” said Jesper Koll, a director at Monex Group, a financial services firm. “For now, the bastion of stability element that has made Japan attractive is not going to be working.”