In the Japanese House of Representatives elections held on October 27, 2024, the ruling coalition of the Liberal Democratic Party (LDP) and Komeito failed to secure a majority of seats. This outcome has raised concerns regarding the future stability of Japanese politics, significantly impacting both the yen and the stock market. Following the announcement of the election results, the yen depreciated to a three-month low, while the Nikkei 225 index experienced a substantial rise. This seemingly contradictory market reaction reveals the complex interplay between political and economic factors.

Firstly, the uncertainty surrounding Japanese politics directly affects the yen's exchange rate. The absence of a clear mandate for any party to lead the world's fourth-largest economy has resulted in the yen depreciating to approximately 153.70 yen per dollar, marking a three-month low. Such depreciation is typically associated with political instability, as investors may seek to relocate their capital to more stable markets, thereby leading to a decline in the domestic currency.

Simultaneously, however, the Japanese stock market witnessed a significant increase. On October 28, the Nikkei 225 index closed at 38,605.53 points, reflecting an increase of 1.82%. This performance may be attributed to differing interpretations of the political turmoil. On one hand, the ruling coalition's poor showing could indicate increased policy uncertainty, which generally exerts pressure on the stock market. On the other hand, the market may have anticipated this outcome and somewhat absorbed the news. Additionally, the depreciation of the yen against the dollar, combined with strong performance in export sectors such as automobiles, likely bolstered the positive performance of the stock market.

Historically, the performance of the Japanese stock market has been closely linked to global risk appetite, relative financing costs, nominal economic growth, and the relative valuation of stocks. When global risk appetite is elevated, the Japanese stock market may benefit. Furthermore, a depreciating yen typically lowers foreign financing costs, often attracting foreign investment and thus boosting the stock market. Additionally, Japanese nominal economic growth tends to improve when the gap with the United States and Europe narrows.

Moreover, the monetary policy of the Bank of Japan also plays a crucial role in influencing both the stock market and the exchange rate. In March 2024, the Bank of Japan announced the termination of its eight-year negative interest rate policy, a decision that significantly impacted market expectations. Bank of Japan Deputy Governor Shinichi Uchida remarked in a speech that even after exiting the negative interest rate policy, the Bank would maintain an accommodative financing environment, as Japan's inflation expectations continue to trend toward the 2% target.

Consequently, the political uncertainty has resulted in a decline in the yen's exchange rate, while the stock market may be buoyed by market expectations concerning policy changes and favorable conditions in the export sector. This interplay highlights the complex decision-making processes that investors face in the context of political risk, as well as the differing responses of various asset classes to the same events. Moving forward, the stability of Japanese politics, the trajectory of monetary policy, and fluctuations in the global economic environment will continue to exert a profound influence on both the yen and the Japanese stock market.