Japanese markets brace for triple whammy if opposition wins big

Japan Times

18-07-2025

Japan faces the possibility of market instability should this weekend's election lead to a dramatic change in the political landscape, particularly if opposition parties gain influence and push for aggressive tax cuts.
'It's possible Japan might experience its own triple whammy of market turmoil, perhaps a Japanese version of the 'Trump crisis' that occurred in April,' said Hideo Kumano, an economist at Dai-Ichi Life Research Institute, referring to a simultaneous fall of stocks, currencies and bonds.
Some analysts suggest the possibility of market disruption similar to the crisis triggered by economic measures proposed by then-U.K. Prime Minister Liz Truss in 2022.
The Upper House election will take place on July 20, and polls indicate that the LDP-Komeito coalition could lose its majority as parties both to the left and right of it gain ground. The coalition lost its majority in the Lower House late last year.
Should the coalition lose big this weekend, Japan could enter a period of uncertainty in which the political fate of Prime Minister Shigeru Ishiba is unresolved and small parties are wooed to join the coalition, or at least work with it, to make governing possible.
Campaigning has been unusually dramatic going into the election. Issues related to the role of foreigners in Japan have entered the political conversation, especially with the rise of Sanseito and its "Japanese First" agenda. Relatively controversial platforms have added to the sense of instability and suggest that the mood post-election could remain unsettled.
In the event of a power vacuum or power-sharing arrangements with smaller parties, tariff negotiations with the United States could be affected right away.
A 25% "reciprocal" tariff is set to kick in on Aug. 1 on most Japanese goods bound for the United States if the two countries are unable to come up with a compromise agreement before then. The loss of the majority and unclear leadership could make last-minute talks difficult and a breakthrough less likely.
If no progress is achieved, most Japanese goods will be subject to the full reciprocal tariff —up from the current 10% — while an existing 25% tariff on autos and 50% tariffs on steel and aluminum will remain.
Analysts said that these high duties could have significant implications for the economy and for the Bank of Japan and interest rates, which could in turn affect the currency.
'The timing to reach a tariff agreement between Japan and the U.S. and details of the deal will be unclear, so the BOJ will be forced to consider delaying its next rate hike,' Kohei Okazaki, chief market economist at Nomura Securities, wrote recently.
If opposition parties gain seats, the government will likely be under intense pressure to introduce expensive policies to help households make ends meet. One possible option being pushed by opposition parties is cutting the consumption tax — currently set at 10% for most products and 8% for food items.
'There is no doubt' Japan will be under additional fiscal strain after the election, Kumano said.
Even if the LDP and Komeito manage to maintain the majority, it's likely that they will come up with new economic measures to counter the economic costs of U.S. tariffs, Kumano said.
An election poster board in Shinjuku. The LDP-Komeito coalition may lose its Upper House majority following this weekend's election. |
Nico Phillips
Japanese markets were rattled in recent weeks as tariff negotiations dragged on and as it became clear that the election could lead to a minority government.
The yen weakened against the dollar, while stocks are off from recent highs. The yield on 30-year Japanese government bonds surged to a record 3.2% on Tuesday, and the yield on 20-year Japanese government bonds hit their highest level since November 1999.
Bond prices move inversely to yields.
'It seems the market has already priced in the possibility of the LDP-Komeito losing its majority,' said Noriatsu Tanji, chief bond strategist at Mizuho Securities. But it's possible that the market has yet to fully price in the worst-case scenario, so volatility could be high after the election, he added.
Tanji said he believes cutting the consumption tax rate alone would not pose a serious risk to Japan's fiscal sustainability, but added that the market's perception of Japan's fiscal health is driven by the prevailing mood rather than detailed discussions.
It's similar to how a healthy bank might face a run if a rumor about it spreads, Tanji said, adding that markets could be volatile due to the prevailing mood.
He added that the exchange rate is more strongly influenced by U.S. factors, so Japan's fiscal expansion alone would not lead to a plunge in the yen.
'I believe the U.S. Federal Reserve will start cutting rates from September, so the yen will be persistently under a certain level of upward pressure,' he said.