There are two main reasons for the recent surge in Japanese government bond yields: the domestic political uncertainty and the Bank of Japan’s policy normalisation process. On the former, there are concerns that the current ruling coalition may not secure a majority in the upcoming election. This outcome could increase uncertainty regarding the domestic political environment, which may affect the country’s tariff negotiations with the US and its fiscal policy.
Second, expectations for a BoJ rate hike have resurfaced. A recent surge in inflation, particularly in food and related items, is likely to prompt the central bank to revise its quarterly inflation outlook, which will be released at the end of this month. As a result, it is possible that a BoJ rate hike could occur sooner than previously anticipated.
The ruling coalition needs a minimum of 50 seats out of 125 contested in order to secure a majority in the Upper House. However, recent polls indicate that there is a significant possibility that the Liberal Democratic Party and Komeito will fall short.
A 13-14 July poll by major newspaper Asahi Shimbun projects the ruling coalition will win approximately 43 seats in this election — 34 for the LDP and 9 for Komeito — down from earlier estimates of 48–56. When combined with their 75 uncontested seats, the coalition would fall short of the 125-seat majority threshold in the Upper House.
One very interesting dynamic this campaign season is that the far-right party, Sanseito, is gaining popularity among conservative voters. Sanseito promotes a “Japan First” policy similar to Donald Trump’s “America First” campaign. Although Sanseito currently holds just one seat, the recent poll suggests that it could potentially secure 8-17 seats, reflecting a surge in support among conservatives and protest voters. While not a direct threat to the LDP’s seat count, Sanseito’s rise poses a strategic challenge by fragmenting the right-leaning vote and reshaping the political narrative.
Election uncertainty has weighed on both JGBs and the yen. If the LDP loses, possible outcomes include PM Shigeru Ishiba stepping down, a snap election, or a new coalition government. Each outcome could complicate government policy and US trade negotiations.
Additionally, numerous populist policies were prominently featured during the election campaign. These include a 20,000 yen voucher, reductions to the consumption tax, increased childcare support, and cuts to social insurance premiums. Such measures are likely to place additional strain on fiscal policy; Japan is already among the most highly indebted countries in the world.