Instant View: Japan gov't loses upper house majority: exit polls

TOKYO (Reuters) - Japanese Prime Minister Naoto Kan's coalition government suffered a major blow in Sunday's upper house election, exit polls showed, threatening efforts to curb massive public debt and putting his own job at risk.

Kan's Democratic Party of Japan (DPJ) and its tiny partner, the People's New Party, were set to lose their combined majority in the upper house, the polls showed.

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KEY POINTS:

-- The Democratic Party will almost certainly stay in power because of its majority in parliament's lower house, but the ruling coalition's failure to win an upper house majority will make it difficult to pass laws smoothly, likely forcing the Democrats to find new partners.

-- The government faces an urgent task of engineering growth while reining in the nation's bulging public debt, the worst among industrial nations at almost twice the size of its economy.

COMMENTARY:

TAKAHIDE KIUCHI, CHIEF ECONOMIST, NOMURA SECURITIES

"As the government won't be able to pass laws easily there will be political stalemate. That's likely to lead to a fall in the yen and Japanese shares. With the drive for a consumption tax hike frustrated, JGBs will be adversely affected. But the impact could be offset by falls in Japanese shares.

"Looking further ahead, it's unlikely the Democrats will do a complete about-face in their policies. Given that the biggest ruling party and the biggest opposition party basically agree on the need to raise the sales tax, it's still likely to be raised in a few years.

"As the economic outlook is becoming unclear and the government's policies will be harder to carry out, there will more pressure on the Bank of Japan to support the economy."

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JUN KATO, SENIOR MANAGER, INVESTMENT DEPT, SHINKIN ASSET

MANAGEMENT

"It looks as though Japan will go back to political deadlock, and that will fan concerns among overseas investors, possibly limiting money flowing into Japan. Japanese share prices will likely suffer due to this, with the yen likely to rise.

"JGBs are seen benefiting from an expected fall in stocks in the near term.

"In the longer term, however, JGBs could come under pressure as Kan's defeat will boost uncertainty about fiscal reform. But even so I don't expect a sharp bond sell-off as domestic investors have lots of funds they need to put to work at the moment."

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KATSUTOSHI INADOME, FIXED-INCOME STRATEGIST, MITSUBISHI UFJ

MORGAN STANLEY SECURITIES

"JGBs are expected to be sold as the focus was on whether the ruling party could retain a majority or not. The superlong JGB sector, which led the recent yield curve flattening, is expected to show the biggest reaction to the election.

"The bond market had not fully priced in such an election outcome, and adjustments are likely to continue. The focus going forward is whether the ruling party will look into forging an alliance with Your Party."

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KYOHEI MORITA, CHIEF ECONOMIST, BARCLAYS CAPITAL JAPAN

"The election result raises the possibility that Kan will be replaced by a new leader in the Democrats' leadership election in September. That means Kan will not be able to carry through his promises to raise the sales tax and to cut corporate tax.

"JGBs may come under selling on the prospect of a delay in fiscal reform, and Japanese shares may also meet with selling on the political deadlock. But such market reactions are likely to prove short-lived because no major policy change is taking place."

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KOICHI ONO, SENIOR STRATEGIST, DAIWA SECURITIES CAPITAL

MARKETS

"It will be difficult for the DPJ to implement its policies as it wishes. Bond yields have fallen partly on the excuse that Kan will press ahead with fiscal reforms, so this is negative for JGBs. Bond yields will move up to a new range, although I think any rise will be moderate as there are a lot of investors who are eager to buy bonds on dips.

"If the DPJ can't find a new coalition partner it will have a negative impact not only on bonds but also on stocks. If Kan is seen as losing his job in September that could lead to more selling of Japanese assets in general. Of course if the yen weakens that is positive for Japanese shares, so the impact could be quite complicated. But it's clearly negative for JGBs."

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TAKUJI OKUBO, CHIEF JAPAN ECONOMIST, SOCIETE GENERALE, TOKYO:

"The DPJ lost a great opportunity to solidify its power base. Though it does have a majority in the more powerful lower house, if it had retained its upper house majority it would have been more powerful. His (Kan's) lack of consistency and leadership skills regarding the tax issue discouraged the electorate.

"Regarding the possibilities for the DPJ, it has two options. One implication is it could form a grand coalition with the LDP because they are broadly saying the same thing on (consumption tax) policy. If that happens, then structurally the reforms agenda would be pushed through parliament as together they have the majority to do so.

"The second option is that they could form a majority with a smaller party such as the Your Party. In that case fiscal consolidation could be greatly delayed and policy might actually be loosened because of its expansionist policies and its opposition to the DPJ's policies.

"The greater possibility is for this (second option) to happen, but after the elections it's difficult to say what the final outcome will be."

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FUMIYUKI NAKANISHI, HEAD OF INVESTMENT INFORMATION DEPT, SMBC

FRIEND SECURITIES, TOKYO

"The market is likely to react negatively if the ruling coalition fails to gain a majority in the upper house, fearing political confusion that is likely to follow.

"But I don't think foreign investors had much expectation of Japanese politics in the first place, so the results alone are unlikely to trigger their selling of Japanese stocks, though they could be less motivated to buy."

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KAZUTAKA OSHIMA, PRESIDENT, RAKUTEN INVESTMENT MANAGEMENT

"The results will likely show that the Japanese people don't approve of the Democrats' leaning toward populism and they will need to engage in more serious discussions about what they should do about Japan's future. The stock market will likely welcome that possibility.

"The Democrats initially took power mainly because they were not the LDP ... People didn't have high expectations toward Kan and Hatoyama to begin with, and even if we end up having a change in prime minister, the impact will likely be very small."

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YOSHIMASA MARUYAMA, ECONOMIST, ITOCHU CORP, JAPAN

"The election results will give the impression that Japan may delay in proceeding with fiscal discipline, so the bond market is expected to face some selling pressure in its initial reaction next week, given the recent global focus on sovereign risk. And the yen is also likely to be sold ... although the reaction will likely be limited.

"The issue is which party the DPJ will form a coalition with. The DPJ will have to compromise in its policies according to its coalition partner and will have difficulty in implementing economic policy. In that case, the Bank of Japan may be under pressure to do something to help the economy."

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