The Japanese Yen strengthened on Monday after Japan’s ruling coalition lost its majority in the upper house, signalling potential political gridlock and market uncertainty in the country’s economy as a key US tariff negotiation deadline approaches.
With Japanese markets closed for the day, the Yen served as a barometer of investor unease, though trading activity indicated that the election outcome was largely anticipated.
The Yen strengthened to 148.44 per Dollar but remained near last week’s 3.5-month low, reflecting investor concerns over Japan’s political and fiscal stability. It also edged up against the Euro to 172.64 and against the Pound to 199.03.
Prime Minister Shigeru Ishiba’s Liberal Democratic Party secured 47 seats in the upper house election, falling short of the 50 needed to maintain a majority in the 248-seat chamber, where half the seats were contested, Reuters reports.
Although the election does not directly threaten Ishiba’s hold on power, it adds significant political pressure to his already embattled leadership, following the loss of control over the more influential lower house in October.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, noted that markets had likely anticipated a more severe defeat for the ruling coalition, and expressed scepticism that the Yen’s recent gains would be sustained.
“It remains unclear whether Ishiba can indeed survive as the Prime Minister… and what it means for Japan’s trade negotiations with the US Prolonged political uncertainty will be negative for Japanese assets, including the Yen.”
Although the election outcome wasn’t a complete surprise to markets, it adds to the challenges facing Japan as it works to secure a tariff agreement with US President Donald Trump ahead of the 1st August deadline.
Last week, Japanese government bonds tumbled, pushing 30-year yields to a record high, while the Yen dropped to multi-month lows against both the US Dollar and the Euro.
Analysts warned that if Ishiba were to resign, the resulting political turmoil could prompt foreign investors to offload Japanese stocks and the Yen.
Yet despite the mounting pressure, Ishiba pledged to remain in office, even as members of his own party debated his leadership and the opposition considered a no-confidence motion.
The heightened political instability is expected to limit the Bank of Japan’s capacity to tighten monetary policy in the short term, according to David Chao, global market strategist for Asia Pacific at Invesco.
“It (BOJ) may be reluctant to add further pressure to an already volatile landscape,” he said.