Uncertainty in the Japanese market after the February 8 elections

The uncertainty that characterized the Japanese market before the February 8 elections left deep marks on investors, highlighting the fragility of confidence sentiments in this political landscape. After the elections, an analysis of the market’s prior behavior reveals that implied volatility reached unprecedented levels, creating an overly cautious climate among market participants.

Nikkei 225 volatility reached record highs

According to Jin10 data, Yoshitaka Suda, senior cross-asset strategist at Nomura Singapore, documented that the implied volatility of the Nikkei 225 index experienced an extraordinary increase during the week leading up to the elections. The index hit 30.6% on the Friday before voting, significantly surpassing the 28.4% level observed before the 2024 House of Representatives elections. This marked the highest level recorded in the past decade during any election period, reflecting palpable distrust regarding the potential outcomes of the electoral process.

Implied volatility behavior typically indicates a higher uncertainty environment and a cautious outlook among market participants. Investors, despite the Liberal Democratic Party leading in polls, maintained a skeptical stance, which translated into these unprecedented risk metrics.

Persistent risks beyond election results

Hideyuki Ishiguro, chief strategist at Nomura Asset Management, provided a nuanced analysis of post-election scenarios. While a decisive victory for the ruling party could generate an immediate positive reaction in asset prices, underlying risks remain that could trigger adverse movements in the short term.

The depreciation of the yen and the potential rise in interest rates due to concerns over fiscal sustainability are concrete threats. These macroeconomic factors could cause sharp corrections in the stock market, even in a context where election results initially favor the government. Fiscal and currency uncertainty remains a backdrop for institutional investors, who continue to carefully evaluate their exposure to the Japanese market.