Japan’s ruling coalition just lost its majority in both chambers of parliament. That hasn’t happened since the party was founded in 1955. The Liberal Democratic Party and its partner Komeito failed to secure the 50 seats needed to hold the Upper House. Final count: 47. That leaves Prime Minister Shigeru Ishiba running a minority government with no legislative control. He says he won’t resign. But the bond market already priced in the fallout.
The 30-year Japanese government bond yield hit 3.225% on July 15. That’s the highest level ever recorded. The 10-year yield closed at 1.599%, a level not seen since 2008. Traders are bracing for fiscal expansion. Opposition parties are pushing for consumption tax cuts, welfare spending, and new subsidies. Sanseito wants to phase out the VAT entirely. The Democratic Party for the People wants to zero out food taxes and expand child payments. These proposals are now part of the legislative mix.
The Yen is sliding. USD/JPY closed at 147.18 on July 18. That’s a 3% move month-to-date. The Bank of Japan is boxed in. Inflation is running at 3.6%. Producer prices rose 2.9% in June. Rice prices doubled year-over-year. The BOJ’s next rate hike is expected in October, but political pressure is mounting to reverse course. The DPP wants the BOJ to abandon its 2% inflation target and return to zero rates. That’s not a fringe view anymore.
The Nikkei 225 is stuck. It closed at 40,168 on Friday. Investors are waiting for clarity. If Ishiba stays, he’ll need opposition support to pass anything. That means compromise. If he steps down, the LDP could pivot toward stimulus to regain voter support. Either way, the bond market is bracing for more issuance. Japan’s debt-to-GDP ratio is already above 250%. A 5% cut to the consumption tax would add 15 to 20 basis points to long yields. That’s baked into current pricing.
U.S. stocks are watching the Yen. A weaker Yen boosts Japanese exporters, but it also signals instability. If Japan can’t strike a trade deal with the U.S. before the August 1 deadline, a 25% tariff hits autos and rice. That’s a direct hit to Japan’s fourth-largest economy. Trump says Japan won’t “open up their country.” Ishiba says he won’t compromise. That standoff is now part of the macro picture.
This is a full-blown fiscal pivot. The bond market sees it. The currency sees it. Equities are next.
Sources:
https://global.chinadaily.com.cn/a/202507/21/WS687d9533a310ad07b5d90eb6.html
https://www.cnbc.com/2025/07/15/japan-bond-yields-surge-as-fiscal-fears-mount-ahead-of-election.html
https://www.ig.com/en/news-and-trade-ideas/japan-2025-elections-250717
