06:09 AM EDT, 10/28/2024 (MT Newswires) -- Yen (JPY) selling picked up early Monday as London traders responded to the news that the LDP-led coalition lost its majority in Japan's parliamentary election Sunday, which opens up a period of political uncertainty, said Mitsubishi UFG.

Prime Minister Shigeru Ishiba's "gamble" to immediately hold a parliamentary election after his appointment as premier in the face of voter anger over the LDP funding scandal now looks foolish and his position as PM is clearly under threat, wrote the bank in a note to clients.

The LDP lost a huge 70 seats and in the new Diet will have 191 seats. Its long-standing coalition partner New Komeito lost 8 seats to hold 24 seats. That means the LDP coalition won 215 seats, well short of the 233 seats required to hold an overall majority. The remainder of the Diet, comprising seven other political parties and others not affiliated with a party, holds 250 seats.

The main opposition party -- the Constitutional Democratic Party of Japan (CDP) won 52 more seats than the previous election to hold 148 seats. Nippon Ishin will be the next largest party with 38 seats, although it lost 3 seats. The Democratic Party for the People (DPP) will be the next largest party, winning 17 seats to hold 28 seats in the new Diet. Non-affiliated 'others' is the next largest block, holding 15 seats, for a gain of 5 seats.

PM Ishiba's position while fragile will depend on his ability to reach an agreement to govern, stated MUFG. CDP leader Yoshihiko Noda has stated he will try and form a government given his party is the largest outside of the LDP-led coalition but in reality, the LDP-New Komeito coalition remains in the strongest position to reach a deal given it is only 18 seats short of the required majority total.

The DPP looks on paper the best prospect of the LDP coalition reaching a deal for a stable coalition government, pointed out the bank. DPP leader Yuichiro Tamaki denied speculation of a deal with the LDP but did then add that the party would consider working with others to achieve the policy goals of DPP. The DPP roots, like the CDP, are from a split in the previous main opposition party, the Democratic Party of Japan with the DPP deemed as more conservative and potentially as such more aligned with the LDP.

A key policy for the DPP is to expand non-taxable income and is as such aligned with PM Ishiba's plans to boost the economy with tax giveaways to protect households from the cost of living crisis. Still, Ishiba more generally has been ideologically more supportive of fiscal consolidation and does again point to Ishiba's position being under threat.

'All things equal' it could be argued that this sudden new political uncertainty could mean the Bank of Japan policy could be on hold for longer, added MUFG. However, all things aren't equal and the renewed yen selling could indeed encourage the BoJ to act sooner.

An alignment with the DPP, if that materializes, could mean bigger fiscal stimulus plans ahead that again could encourage the BoJ to act sooner. Over the short term, the movement of the yen will be important and this election coming ahead of the key United States employment report on Friday, the US presidential election next week and the FOMC next week too will likely take precedence in shaping BoJ policy expectations, according to the bank.

A move back toward the highs of earlier this year above the 160 level would mean a hike by the BoJ in December is certainly in play.