Why investors aren't cheering Abe's election victory

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Japan's ruling coalition extended its super-majority in snap parliamentary elections Sunday, buying Prime Minister Shinzo Abe more time to heal the ailing economy. So, why are Tokyo stocks falling?

The benchmark Nikkei 225 traded down 1.2 percent on Monday after polls showed the leading Liberal Democratic Party (LDP) party along with its coalition partner, New Komeito, won 326 seats in Japan's 475-seat lower house.

The LDP won 291 seats, slightly short of the 295 it held before the poll, while New Komeito won 35 seats, up from 31 previously. Meanwhile, the opposition Democratic Party of Japan (DJP) won 73 seats, more than the 62 it had before the election.

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"Relative to expectations, this is not a landslide. It's just a confirmation of Abe's grip on power," Jesper Koll, MD and head of Japanese equity research at JPMorgan Securities told CNBC.

"For all intents and purposes, the opposition was the one who gained," he added.

As such, Koll says the results of the snap elections are unlikely to be a fresh catalyst for the Japanese equity market, which is up 6 percent year to date.

"While this is an endorsement for Abe, are there any new policies? No. It's business as usual," he said.

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Stan Shamu, strategist at IG says the market's muted reaction indicates that Abe's victory was largely expected.

Investors are awaiting announcements from Abe on what he's going to do to mend the economy moving forward, Shamu said; this will influence the direction of the market in the coming week.

"I don't think this weakness in Japan will be a permanent fixture. Traders will be looking to buy dips in the market," he said.

Abe faces plethora of challenges

In 2015, the Abe administration will face several challenges that necessitate careful navigation to regain the trust and support of the Japanese people, says Goldman Sachs.

"Chief among them the creation of national security-related legislation, including a revised interpretation of the Constitution, the restarting of nuclear reactors, and the Trans-Pacific Partnership," the bank wrote in a note on Monday.

"Meeting these political challenges requires a strong Cabinet approval rating, and we thus believe the administration will need to swiftly rebuild an economy essentially in recession, albeit technical," it added.

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The Japanese economy is still struggling to shake off the blow of April's consumption tax hike that has been a drag on private consumption. The economy shrank an annualized 1.9 percent during the July-September period, worse than a preliminary reading for a 1.6 percent contraction.

"Many overseas investors that have supported the recent stock market rally are looking for long-term stability from the Abe administration and for progress in structural reforms (the "third arrow" of Abenomics) beyond current economic stimulus measures," Goldman said.

"We believe they might be underwhelmed if the government were to settle only for an election victory and fall short on its commitment to structural reforms."