Asia FX muted despite Fed cut bets; Japanese yen slides after PM Ishiba resigns
Investing.com-- Japanese stocks are likely to remain supported by export-oriented value stocks despite heightened political uncertainty in the country, Morgan Stanley MUFG Securities said in a research note.
Market focus is squarely on whether Prime Minister Shigeru Ishiba will face a snap leadership contest within the ruling Liberal Democratic Party (LDP) following its defeat in the recent upper house election.
If a majority of party lawmakers and prefectural representatives demand it on September 8, Ishiba may be forced to step down, triggering a new leadership race. Even if a contest is delayed, Morgan Stanley warned that political uncertainty will persist due to a weakened administration, given that the LDP will need to collaborate with smaller, regional parties to push its policies.
The note highlighted that candidates such as Sanae Takaichi, who favors expansionary fiscal policy and nuclear energy restarts, and Shinjiro Koizumi, who emphasizes labor market reforms, could attract investor attention in a post-Ishiba scenario.
Morgan Stanley said the relative strength of value stocks tied to external demand—such as automobiles, steel, and industrials—will likely continue as long as the U.S. Federal Reserve’s implied terminal rate remains around the 3% “neutral” level.
A stable U.S. dollar/yen exchange rate has been a key driver of Japanese equity performance, with the Nikkei 225 benchmark hitting a series of record highs in August as the yen weakened.
Morgan Stanley also adjusted its focus list, removing Kawasaki Heavy Industries, Ltd. (TYO:7012) and adding Hokkaido Electric Power Co Inc (TYO:9509), citing expectations for lower thermal fuel costs after the planned restart of its Tomari nuclear plant.
Japanese equities persevered in 2025 after strong gains in the prior year. The Nikkei 225 is trading up nearly 10% so far this year, while the TOPIX has risen about 13%. Upbeat corporate earnings, guidance upgrades and continued foreign inflows were major points of support.
Export stocks remained resilient despite increased headwinds from higher U.S. trade tariffs, although a recent trade deal between Tokyo and Washington heralded fewer hurdles.