Asian Markets Defy Gravity Amidst Japan Election Risks

Asian markets are rallying despite heightened political risk in Japan ahead of an upper house election on Sunday, which threatens the ruling coalition's majority. The election could add to instability at a time of uncertainty over interest rates and trade talks with the US. European markets are set for a higher open, with the Euro Stoxx 50 futures up 0.3%.

Asian markets are rallying despite heightened political risk in Japan ahead of an upper house election on Sunday, which threatens the ruling coalition's majority. The election could add to instability at a time of uncertainty over interest rates and trade talks with the United States. European markets are set for a higher open, with the Euro Stoxx 50 futures up 0.3% [1].

Investors are closely monitoring the upper house election in Japan, where the ruling Liberal Democratic Party (LDP) and its partner Komeito are forecast to lose their majority. This outcome could leave Prime Minister Shigeru Ishiba's government vulnerable to opposition parties advocating for fiscal largesse, potentially exacerbating the selling of Japan's government bonds [2]. The LDP needs to win 50 seats out of the 125 up for grabs to retain its majority. Analysts suggest that Ishiba may have to resign if he faces an overwhelming loss, which could complicate tariff talks with the U.S. [2].

The political uncertainty in Japan is weighing down Japanese shares, bonds, and the yen. The yen is headed for a second straight week of losses, down about 0.7% to 148.45 per dollar and near a two-month low. Yields on 10-year JGBs slipped 1 basis point to 1.545% on Friday but have not strayed far from a 17-year high of 1.585% hit earlier in the week [1].

Despite the political risk in Japan, Asian markets are continuing to defy gravity. MSCI's broadest index of Asia-Pacific shares outside Japan hit its highest since late 2021. Wall Street closed at yet another record high as investors latched onto positive economic signals, spurring a rally in most Asian markets that looks set to continue in Europe [1].

Investors appear happy with a still-resilient U.S. economy and robust corporate earnings. Wall Street futures are a tad firmer while results at Netflix (NFLX.O) exceeded forecasts, in part due to a weaker dollar, which could bode well for corporate America's export earnings [1].

Key developments that could influence markets on Friday include the Germany PPI for June, speeches by German Finance Minister Lars Klingbeil and Bundesbank President Joachim Nagel on the sidelines of the G20 meeting in Durban, and the U.S. University of Michigan Consumer Sentiment survey [1].

In summary, while Asian markets are rallying, the political uncertainty in Japan could add to instability. European markets are set for a higher open, with the Euro Stoxx 50 futures up 0.3%. Investors will continue to monitor the upper house election in Japan and other key economic indicators.

References:
[1] https://www.reuters.com/world/china/global-markets-view-europe-2025-07-18/
[2] https://www.investing.com/news/forex-news/japans-minority-government-faces-election-snub-as-economic-storm-brews-4140836