Japanese prime minister Junichiro Koizumi was returned to power in the general election but with a lower majority, raising concerns that key economic reforms will be hindered. Koizumi's Liberal Democratic Party won 237 seats, down from the 247 it held in the lower house before the poll. "This will make it more difficult for the party to push through unpopular but essential structural reforms," said Rossa White at Davy Stockbrokers.
Shares in Tokyo declined sharply after the results were published, with the Nikkei 225 stock market index dropping 1.2pc. The banking sector, one of the key areas Koizumi has targeted for reform, was the hardest hit by the sell-off. The yen declined against the dollar, allowing the US currency to rise to 109.50 yen from USD109.25 late Friday. The loss of the seats may also make it more difficult for Koizumi to rein in public spending. Opposition parties and coalition partners want the government to increase spending to ensure the Japanese economy, which expanded by 1.0pc in the three months to June, continues to recover. //www.fxcentre.com