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TOKYO: Japanese stocks fell more than one per cent in early deals Monday, hit by recent losses on Wall Street and fears of domestic policy gridlock after a weekend election blow for the government, dealers said.
Prime Minister Shinzo Abe's government suffered a heavy defeat in Sunday's elections for the less powerful upper house of parliament, but he vowed to stay in power to try to continue with his conservative agenda.
"It will take some time before the market settles down because of the uncertainty about the Japanese political scene and the US market," said Koji Takeuchi, an analyst at Mizuho Research Institute.
The Tokyo Stock Exchange's benchmark Nikkei-225 index of leading shares lost 188.40 points or 1.09 per cent to 17,095.41 in early morning trade.
The election result raised fears of policy paralysis in the world's second-largest economy, with the upper house set to be controlled by a left-of-centre opposition.
Since taking office Abe has appeared to focus more on constitutional and educational reform than the economy compared to his market-friendly predecessor Junichiro Koizumi.
Investors now fear that already flagging economic reforms may get bogged down amid bickering between the two main political forces, even as an ageing population puts growing strains on Asia's largest economy.
"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 the election drubbing for Abe. The dollar changed hands for 118.50 yen in early Tokyo 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.
There is even 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.
If the 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 per cent on Friday. - AFP/ac
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