Japan holds upper house elections on Sunday, July 20, in a key mid-term test for Prime Minister Shigeru Ishiba’s ruling LDP–Komeito coalition.
- The vote will decide 124 of 248 seats and follows last year’s lower house setback for the government.
- Recent polling suggests the LDP may lose its upper house majority, adding political instability to already complex macroeconomic conditions.
- Ishiba’s approval ratings have slipped to around 34%, as voters contend with rising living costs, the impact of U.S. tariffs, and questions around fiscal discipline.
Opposition parties are gaining traction on platforms of increased spending and tax relief, with some pushing for fiscal stimulus packages well beyond the government’s proposed ¥3.5 trillion. A shift toward a more populist-leaning or fragmented upper house could pressure Japan’s fiscal position further, complicating the Bank of Japan’s cautious normalization path and raising concerns among investors.
JGBs and yen brace for political and policy implications
Should the LDP suffer losses and fiscal expansion accelerate, JGB markets may see upward pressure on yields, especially in the longer tenors, as debt sustainability questions resurface.
- Traders are watching for signs of larger stimulus programs—which could test Japan’s already heavy debt load and revive latent credit rating risks.
- The BoJ may also face a tougher communication environment if bond market volatility intensifies, particularly at the long end of the curve.
The yen, meanwhile, could see two-way volatility.
- A decisive LDP win may signal policy continuity, but also entrench expectations of continued fiscal support—potentially weighing on the yen.
- Conversely, a strong opposition showing might generate short-term political uncertainty and offer the yen a modest safe-haven bid. A ‘safe-haven’ yen bid has been absent recently though.
Ultimately, yen direction will remain sensitive to U.S
