As expected, the LDP lost its majority in the upper house. Late reports from NHK show the LDP + Komeito losing 44 x 59 against the DPJ, with only three seats left. (See coverage by Reuters) PM Shinzo Abe says he’s staying despite the “severe” situation.

Japanese stocks are likely to be mostly range bound with no reason for bullishness above 1,800 or 18,000 for the TOPIX and Nikkei 225 Stock Average, respectively. We believe the risk/reward ratio is fairly even, with no more than 10% to either side and more likely a move of about 5%.

A stronger yen has positive implications for ADR investors, but shares of “exporter” stocks will likely be volatile. It is difficult to judge whether any further yen strength will result in repatriation and subsequent shifting to domestic equities. Bank stocks have limited perceived upside due to a tough lending environment and competition.

A Bank of Japan [BoJ] rate hike is still widely expected in August. Still, a post-August follow-on hike might not happen until year end or early ‘08. Thus, in general, expect continued volatility and for the most part, range bound trading. Concerns over the U.S. economy and drops like we’ve seen recently in the U.S. do not bode well for Japanese stocks.

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