The yen and Japanese stocks rose while bond prices sank on Monday as markets took heart from signs that Prime Minister Junichiro Koizumi would stay in power despite a setback for his Liberal Democratic Party (LDP) in a weekend election. Some analysts wondered if the election might weaken Koizumi but most said his banking reforms -- most important for financial markets -- seemed safe, helped by the election of Financial Services Minister Heizo Takenaka as a candidate for the LDP in Sunday's upper house election. "Koizumi's power may weaken and that could effect his reforms but since there are no possible successors, markets are unlikely to move much," said Takashi Yamanaka, economist at UFJ Bank. "The economy is strong and a possible political shakeup shouldn't have as much effect as it would have had when it was still weak." The LDP won 49 seats, short of its modest target of 51, of the 121 seats at stake in the upper house election, final media projections showed, but Koizumi vowed to stay in power as his ruling coalition retained its majority. The LDP also holds a majority in the more powerful lower chamber, which chooses the prime minister. Reacting to the results, the yen jumped over half a yen to as high as 107.56 per dollar , its highest since June 28. "The market is buying back the yen after selling last week on speculation that the LDP would suffer a bigger setback," said Kikuko Takeda, a currency analyst at Bank of Tokyo-Mitsubishi. "The election shouldn't have much impact on the market. The results were nothing more or less than what the market had factored in."
STRONG FUNDAMENTALS
Some analysts said the market could shift its focus back to last week's upbeat household spending data, and machinery orders figures that showed a slight drop in orders for May but reinforced views that Japan's economic recovery remains strong. "The market has been very focused on the election, but we've seen a lot of good data go unrewarded lately ... The yen could start strengthening again and test 106 (to the dollar) this week," said Naomi Fink, a strategist at BNP Paribas. The stock market also shrugged off the election results, with the benchmark Nikkei average <.N225> up over 1.5 percent at 11,596 by early afternoon. Foreign investors, who have led the Tokyo stock market's 40 percent rebound since April last year and an accompanying appreciation of the yen, were also encouraged by projections that Takenaka had secured a seat. Takenaka, an academic drafted into the cabinet, is seen as a symbol of banking reforms, a key driver behind a recovery in Tokyo share prices from two-decade lows hit last year. Pressured by a jump in share prices, the yield on cash benchmark 10-year Japanese government bond (JGB) firmed to 3.5 basis points to 1.835 percent, its highest since July 1. Some bond analysts said conservatives in the LDP could step up pressure on Koizumi to raise public spending, but most do not expect more large-scale fiscal spending, especially at a time when the economy is showing the strongest growth in more than a decade. Koizumi has aimed to cut back government spending by limiting new JGB issuance, as public debt has ballooned to 140 percent of the gross domestic product -- the biggest in the industrial world -- mostly due to massive spending on public works in the last decade or so in efforts to kickstart the economy. The benchmark JGB yield has quadrupled after hitting a record low of 0.43 percent in June last year.///