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TOKYO - Japanese stocks slumped to a near four-month low Monday as political upheaval after weekend polls raised fears economic reform could stall, adding to gloom over heavy losses on Wall Street, dealers said.
But the yen shrugged off the political uncertainty sparked by a heavy defeat for Prime Minister Shinzo Abe's government in Sunday's elections that handed the opposition control of the less powerful upper house of parliament.
"Over the medium term, the stock market will not benefit from this change in the political landscape," said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.
"For the coming month or two, I think the Japanese market will remain soft" as investors fret about the health of the US and local economies, he added.
There is speculation that the election rout could prompt the Bank of Japan to delay raising interest rates to avoid spooking already nervous financial markets, particularly after a recent earthquake in central Japan.
The Tokyo Stock Exchange's benchmark Nikkei-225 index of leading shares lost 172.64 points to 17,111.17 by lunch, a level last seen in early April.
The election result raised fears of policy gridlock in the world's second-largest economy, with the upper house set to be controlled by the left-of-centre Democratic Party of Japan (DPJ).
Already flagging economic reforms may now get bogged down amid bickering between the two main political forces, even as an ageing population puts growing strains on Asia's largest economy, analysts said.
"Policy uncertainties will worsen for at least a year," Morgan Stanley economist Robert Feldman wrote in a note to clients.
"The ability of the Diet (parliament) to pass legislation will fall and markets will become frustrated. While gridlock continues, equities will languish," he added.
The Japanese currency showed resilience in the face of Abe's election drubbing.
The dollar slipped to 118.52 yen in Tokyo morning trade, down slightly from 118.60 in New York late Friday.
But analysts warned of potential turbulence ahead.
"Political instability and economic reform policy backlash are likely to be negative for the yen," predicted Barclays Capital analyst Toru Umemoto.
If the (central) bank skips an August rate hike, it will also be negative for the yen, added Umemoto.
As well as the election result, investors were unnerved by fresh losses on Wall Street where fears of a housing slump and a potential credit crunch pushed the Dow Jones index down 1.54 percent on Friday.
Since taking office, Abe has appeared to focus more on constitutional and educational reform than on the economy compared with his market-friendly predecessor Junichiro Koizumi.
Abe said after the election setback that he would press ahead with his signature policy goals despite signs voters are more worried about the economy.
Credit Suisse's Shirakawa said Abe may now try to become more friendly with the DPJ to win support for a redrafting of the pacifist constitution.
"That means the DPJ will have a bigger influence over macro-economic policy. That to me is negative. I don't think the DPJ's prescriptions for the economy are right," he said, criticising its support for an income tax hike. - AFP/ir
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