USD/JPY fell 0.4% following Japan’s upper house election results, where the ruling bloc lost its majority. Market participants are reacting to increased political uncertainty in Japan.

USD/JPY fell 0.4% following Japan’s upper house election results, where the ruling bloc lost its majority. Market participants are reacting to increased political uncertainty in Japan.

Following Japan’s upper house election results, the USD/JPY currency pair fell by 0.4%. The ruling coalition, led by Prime Minister Shigeru Ishiba, lost its majority, leading to increased political uncertainty in the country [1].

The election outcome, while not entirely surprising, has set the stage for potential policy paralysis and a larger fiscal deficit. Analysts expect it to take time for the implications of the coalition's loss to fully materialize. The Japanese markets were closed on Monday for a holiday, but the yen is likely to provide the first signs of any disruption from the election results [1].

The election result comes at a critical time for Japan, with ongoing negotiations with the U.S. over a tariff deal before an August 1 deadline. The weakened yen and rising yields on Japanese government bonds (JGBs) reflect market concerns about future fiscal policy and the possibility of tax cuts or increased government spending [1].

Investors are closely monitoring the situation, with the Democratic Party for the People (DPP) and other opposition parties backing some form of consumption tax cuts. The populist right-wing Sanseito party has even proposed a phase-out of the value-added tax (VAT) altogether, which would require increased government bond issuance. With Japan already the world’s most indebted major country, this could exacerbate fiscal concerns [1].

The election results have also raised questions about the future of the ruling coalition. While the Liberal Democratic Party (LDP) is expected to remain the largest bloc, its diminished majority could affect its ability to choose a prime minister and drive crucial policy reforms. If Prime Minister Ishiba resigns, the political uncertainty could lead to foreign investors selling Japanese shares and the yen [1].

In the immediate aftermath of the election, the yen has remained volatile, with the currency trading in a range of 140-160 per dollar. Long speculative positions in the yen are still very large, making it likely that the currency will fall rapidly if Japan calls for a snap election or fiscal policy is loosened [1].

The Nikkei 225 benchmark, by contrast, has been relatively resilient, rising more than 11% since April 2 when U.S. President Donald Trump unveiled his global tariffs. However, the market's focus is now shifting towards the political uncertainty and potential fiscal policy changes resulting from the election [1].

Investors should closely monitor the political developments in Japan, as they could have significant implications for the country's economic outlook and financial markets. The USD/JPY currency pair will continue to be influenced by political and policy concerns, as well as the ongoing trade negotiations with the U.S. [1].

References:
[1] https://www.investing.com/news/economy-news/japan-ruling-partys-election-loss-is-in-the-price-investors-say-4142801
[2] https://asia.nikkei.com/Politics/Japan-election/Japan-election-live-Ruling-coalition-at-risk-of-losing-majority
[3] https://www.ig.com/en/news-and-trade-ideas/japan-2025-elections-250717