Nikkei set for weekly fall amid domestic election jitters

Japan's Nikkei share average was set to mark a second week of declines on Friday as investors weighed the risk outlooks ahead of a domestic election that could see the ruling party lose its majority.

The Nikkei fell nearly 1 per cent to 37,771.79 by the midday break, putting the benchmark index on track for a 3 per cent loss for the week.

The broader Topix was also down 1 per cent at 2,609.83.

The markets have been on edge as recent opinion polls suggest voters could end the Liberal Democratic Party's over decade-long dominance on Sunday, forcing the ruling party into power-sharing deals that may undermine the country's leadership.

"That's basically the scenario for 'sell Japan'," with investors considering various scenarios on how such an outcome could impact the fiscal and monetary policy outlook, said Naka Matsuzawa, chief macro strategist at Nomura Securities.

The losses were widespread as investors adjusted positions on Friday, the last day of trading before votes are counted on Oct. 27. Of the Nikkei 's 225 constituents, 189 declined, while only 34 advanced in the morning session. Two were untraded.

All 33 industry sectors were in the red, led by the shipping sector's 2.6 per cent decline and insurers falling 1.8 per cent.

Uniqlo's parent firm, Fast Retailing, shed 1.3 per cent and weighed the most on the Nikkei .

Among other major shares, chip-testing equipment maker Advantest was down 2.2 per cent, staffing agency Recruit Holdings lost 3 per cent and AI-focused startup investor SoftBank Group dropped 1.4 per cent.

Barclays analysts expect a "knee-jerk risk-off move" if the LDP loses a simple majority with coalition partner Komeito, but say the impact will depend on the severity of the loss.

"Stocks move on rather quickly from political certainty but political uncertainty tends to exert a lasting negative impact," they wrote in a note on Tuesday.