Japan politics once again back in focus

The markets may pay more attention to Japanese politics over the short term should the support rate fall further as the bills in question are debated in the Upper House through September. This could give rise to the risks of lower share prices and a stronger JPY temporarily.

Prime Minister Shinzo Abe's popularity has plummeted this summer. The main reason is believed to be the national security bills and the sharp divide in public opinion over the ruling coalition's handling of the bills in the Diet. The FX market is primarily driven by policy divergence, and absent an extreme scenario Japan's domestic politics should have only a secondary impact on the markets. 

But the Abe administration falling apart and the resulting market volatility remain no more than tail risks so the continued lack of viable alternatives. Rather, how Abe will deal with his weaker support ahead of next summer's Upper House elections will probably be the point to watch. 

"In short then, there are greater incentives to boost asset markets, and these could rather become positive for Japanese equity and marginally negative for JPY over the medium term. Abe's falling support can weigh over risk but could urge more reflation eventually", says RBC Capital Markets.