The Japanese "Black Swan" has indeed arrived, with the ruling party suffering a disastrous defeat in the general election. Why did the Japanese stock market still soar?

A major earthquake in the Japanese political arena, where Shinzo Abe, who hoped to consolidate his political foundation through early elections, unexpectedly suffered a devastating defeat.

The ruling coalition failed to secure a majority of seats, raising questions about whether Shinzo Abe can continue to maintain power. If Shinzo Abe steps down, Japan may return to a period of frequent changes in prime ministers, casting a huge cloud of uncertainty over the Japanese market.

However, as of the time of writing, the Japanese stock market is rising. The Nikkei 225 index has expanded by 1.79%.

Analysts believe that the devastating defeat of the ruling coalition is not surprising, as the market was prepared and had already priced in 60-80% of this outcome. However, since this outcome was not fully priced in, the Japanese yen and stocks may come under pressure in the short term.

Goldman Sachs predicts that the Nikkei index will fall by about 2% on Monday, but as investors realize that the Liberal Democratic Party will find it difficult to gain support from the Japan Innovation Party and the Democratic Party of Japan, the decline is expected to last for about a week.

Ruling Coalition's Devastating Defeat - Shinzo Abe: Will Not Resign

On October 28, according to Xinhua News Agency, in the 50th House of Representatives election held on the 27th in Japan, the ruling coalition obtained a total of 215 seats, failing to exceed half of the 465 seats in the House of Representatives. Among them, the Liberal Democratic Party won 191 seats, a decrease of 56 from the pre-election 247, and the Komeito party's seats decreased from 32 to 24.

In the opposition parties, the Constitutional Democratic Party surged from 98 seats to 148 seats, becoming the second largest force in the House of Representatives after the Liberal Democratic Party. The Democratic Party for the People also increased its seats from 7 to 28.

The election defeat means that the ruling coalition has lost its parliamentary discourse power, and whether Shinzo Abe can continue to maintain power has become the focus. Shinzo Abe was elected as the new Prime Minister of Japan on the 1st of this month, and Sunday marked the 27th day of his term. If he resigns after the election setback, he will become the shortest-serving prime minister since the end of World War II.

The Global Times cited media analysis pointing out that if Shinzo Abe steps down, Japan may once again see frequent changes in leadership, similar to a "revolving door" situation.

Currently, Shinzo Abe has stated that he will not resign.

According to the Global Times citing TBS News Network in Japan, after the voting ended, Shinzo Abe said on a TV program on the evening of the 27th, "I realize that the current situation is very severe," and "I have not received any understanding from the voters on political and financial issues, which is the main reason." He also stated that he will not resign and will "fulfill his duties," saying, "From now on, we must make every effort to achieve policy goals."

Market Expectations, But Not Fully Priced In

Tim Waterer, Chief Market Analyst at KCM Trade, said, "If the Liberal Democratic Party does indeed lose its majority power, this could create a deadlock in the legislative process - at least in the short term, this may not be good news for the yen and the Nikkei index."

Ippei Yamaura, a FICC trader at Goldman Sachs Japan, said that this outcome is not surprising. After media reports last week suggested the possibility of the Liberal Democratic Party and Komeito losing their majority seats, the market had already begun to price in this news, but it was not fully priced in.As of last Friday, the market's expectations are as follows:

• The possibility of the Liberal Democratic Party (LDP) maintaining a simple majority (233+) is 5%: In this case, the expected market trend would be a rise in stocks and a strengthening of the Japanese yen.

• The possibility of the LDP + Komeito maintaining a majority (233+) is 35%: In this case, the expected market trend would be a rise in stocks and the Japanese yen remaining stable.

• The possibility of the LDP + Komeito failing to maintain a majority is 60%: In this case, the expected market trend would be a decline in stocks and a weakening of the Japanese yen, as the LDP may need support from the Nippon Ishin no Kai and the Democratic Party of Japan, both of which support loose monetary policies.

Goldman Sachs has stated that the market may have already priced in 60-80% probability of this outcome. Yamaura predicts that the Nikkei index will fall on Monday, ultimately dropping by about 2%. However, as investors realize the difficulty the LDP faces in gaining support from Nippon Ishin no Kai and the Democratic Party of Japan, the decline is expected to last for about a week.

Meanwhile, in its analysis last week, Barclays pointed out that in the worst-case "tail risk" scenario, where the LDP and Komeito alliance loses enough seats to form a government, the market may exhibit classic risk aversion sentiment.

In this scenario, it is expected that the Japanese yen will appreciate, long bond yields will decrease, and Japanese stocks will decline. Specifically, Barclays predicts that the USD/JPY may fall by 2%, the 10-year Japanese government bond yield will decrease by 7 basis points, and the Nikkei 225 index may plummet by 5%