| I’m starting to think that the folk who predict the results of elections aren’t doing such a great job of it. We’ve just had another “surprise” outcome, this time from Japan. The ruling Liberal Democratic Party-led coalition has lost its majority for the first time in 15 years. This in turn means that Prime Minister Shigeru Ishiba — who’s held the role for rather less time than Keir Starmer has been leader of the UK — is already under pressure to resign. The biggest problem with that is it’s not obvious who could replace him. Basically the Japanese are fed up for the same reasons as every other electorate around the world. The cost of living has gone up, and while wages have gone up too, they haven’t kept pace sufficiently to offset the misery caused by the higher prices. They didn’t vote “for” anyone in particular, they just voted “against” the incumbents. Hmm. Sounds familiar. Turns out that Japanese economic exceptionalism, such as it is, has never been rooted in anything more complicated than their economy having been at a different stage of the cycle than that of most other nations. So what are the likely effects on markets, if any? The Yen Carry Trade Looms Again If you’re not based in a given country — and thus not subject to most of its tax rules and the like — then in my view, the main mechanism by which politics affects global markets (if it does at all) is via the impact on monetary policy. The Bank of Japan is a globally significant central bank. What it does, matters on the global stage. For example, if you’ll remember, the market mini-squall we saw in August was related to the unwinding of the yen carry trade. To cut a long story short, lots of people were, in effect, borrowing money in yen (because interest rates were so low) to buy other assets. That’s a bet on the yen continuing to weaken. But as the Japanese central bank finally started raising interest rates this year, the yen strengthened instead. As a result, people who were “short” the yen in this way (betting on it getting weaker) rushed to close their bets. They sold assets they had bought with the borrowed yen, and repaid their yen loans. The yen strengthened further, while the assets they had owned sold off (this is a stylised explanation, but you get the point). There was a lot of concern about the carry trade having much further to go, given that the yen is currently still very weak compared to recent history. Yet since that squall, the yen’s value against the dollar has dropped again, and it’s now as weak as it was in early summer. And all else being equal, the strategists seem to believe that a period of political confusion in Japan will mean that the central bank takes less of a hard line. In other words, the yen may just stay weak as monetary policy remains looser than expected. That probably explains why Japanese stock markets went up this morning. This theory makes sense, but I’ll admit that I don’t have strong conviction on this one. Despite my little dig at political punditry in the intro to today’s newsletter, it’s always extremely difficult to second-guess electoral outcomes, and it’s even harder if you’re not a local. Politics hinges on details. As an outsider, you simply don’t understand the details, as should rapidly become obvious to anyone watching or reading a US commentator’s attempts to make sense of a UK election (and, of course, very much vice versa). One thing I wonder about is this: if the voters are fed up because of inflation (and this has been a running theme — the election is just the latest bit of proof that it’s an issue), then how long before that forces politicians to react, and thus results in the central bank raising rates again? The market panic in August certainly made the hurdle higher (no country wants to cop the blame for a massive market crash), but if it comes down to a perception of “markets versus the people,” there’s only so long before the side that matters most to politicians’ careers wins. At the moment, the current prime minister is saying that he won’t step down and the vague consensus seems to be that we’re just in for another few years of Japan having lots of different prime ministers — which, despite the current sense that Japan is an ocean of political stability, would not be all that unusual. But if we’ve learned anything about politics — surely! — by now, it’s to expect the unexpected. Anyway, as with most events, this is nothing to make big changes to your portfolio over. But do be psychologically prepared for a hairy few weeks. Obviously we have our wonderful budget coming on Wednesday, which by now has been built up to be so awful that it would take a truly heroic effort by Rachel Reeves for it to be even worse than expected. And then — from a global point of view — there’s the biggie, the US election. But we can discuss that one closer to the day. Send any feedback, opinions or questions to jstepek2@bloomberg.net and I’ll print the best. If you were forwarded this email by a friend or colleague, subscribe here to get your own copy. - It’s a painful irony that the EU is now waking up and belatedly starting to address the issues that caused Brexit, says Clive Crook.
- Don’t miss the latest episode of Merryn Talks Money in which author and economist David McWilliams explains why money is the most transformative technology humans have ever come up with.
 The gone-but-not-forgotten drachma. Everything is a footnote to the Greeks, etc. Photographer: Simon Dawson Looking at wider markets — the FTSE 100 is down 0.3% at around 8,230. The FTSE 250 is down 0.2% at 20,780. Gold is down 0.5% at $2,730 an ounce, and oil (as measured by Brent crude) is down about 5.6% (because concerns of a larger flare-up between Israel and Iran have eased for now) to $71.70 a barrel. Bitcoin is up 1.3% at $68,590 per coin, while Ethereum is up 1.1% at $2,520. The pound is up 0.3% against the US dollar at $1.299, and is flat against the euro at €1.120. Follow UK Markets Today for up-to-the-minute news and analysis that move markets. | 
