The LDP coalition is likely to lose it’s majority in today’s elections. We give 40% chance to it retaining majority from 60% chance two weeks ago. Public concerns regarding inflation and broader cost of living pressures, housing, and a backlash against the LDP for the slush fund scandal could well see party support decline to the point that it falls below the 233-seat majority threshold. The prospect that the coalition fails to secure a majority today has become so real in the eyes of Team Ishiba that it now has a contingency scenario to ensure that Takaichi would not become the new PM. They would want to settle on a caretaker PM quickly to avoid a chance that Takaichi would become the next PM. Their initial candidate is FM Kato, because he is a decent individual and as a former MoF official he can rally support of the country’s powerful technocrats. Irrespective of the no of seats which LDP wins today, the upcoming fiscal package will be significantly larger than last year's budget. 2. The BoJ will likely stand pat in December due to increased political uncertainty.Moreover, the fiscal process has been delayed by at least about a month. Our point here is that fiscal debates will likely be raging when the BoJ’s December meeting takes place, and we don’t think that the BoJ would like to hike rates in the midst of them. Only condition is if JPY starts breaching 160 levels & it is seen as a loss of confidence on Ishiba or a new PM, the administration could start urging the BoJ to hike rates to stem the Yen depreciation. But we would see MoF currency intervention before the administration would pressure the BoJ to hike rates. In a wild case scenario if the opposing CDP becomes the largest seat party, yet LDP might be able to form government with the help of Ishin & Komeito. But this implies Takaichi's being the PM which means the return of expansionary policies of Abe. This in turn implies JPY testing 155 levels immediately tomorrow.
