With the Japanese Senate elections approaching, Nomura states that "this possibility is increasing": the Prime Minister's resignation and stalled Japan-U.S. negotiations, Japan faces tax increases

An election that could reshape Japan's political landscape is approaching.

According to the news from the Wind Trading Desk, a research report released by Nomura Securities on July 14 shows that with only one week left until the Japanese Senate election, the likelihood of the ruling coalition losing its majority is increasing. Multiple opinion polls indicate a downward trend in the number of seats expected to be won by the ruling coalition, which could lead to Prime Minister Shigeru Ishiba's resignation, a pause in US-Japan trade negotiations, weakened expectations for interest rate hikes, and significant impacts on Japan's stock market and monetary policy.

The ruling coalition is facing a critical situation, with polling data continuously deteriorating. According to an online survey conducted by the Japanese media "Mainichi Shimbun" and JNN from July 12-13, the ruling coalition (Liberal Democratic Party and Komeito) is expected to win 31-55 seats, while maintaining a majority in the Senate requires 50 seats.

Even more concerning is the downward trend in seat predictions. According to the Nomura Securities report, the June 30 edition of the Japanese media "Aera" predicted that the ruling coalition would secure 54-58 seats, while the July 3 edition of "Bungeishunju" revised the prediction down to 46 seats, and the prediction from Senkyo Dot Com as of July 10 was 41-53 seats, indicating a significant decline in the expected number of seats for the ruling coalition over time.

Increased Likelihood of Prime Minister's Resignation and Negotiation Stalemate

Nomura Securities pointed out in the report that if the ruling coalition retains a majority (≥50 seats), Shigeru Ishiba's administration will continue, and US-Japan trade negotiations will proceed as planned until the August 1 deadline. However, this scenario may accelerate the Bank of Japan's interest rate hike pace, pushing the yen to appreciate and suppressing the stock market.

If the ruling coalition secures fewer than 50 seats and thus loses its majority in the Senate, it is highly likely that Shigeru Ishiba's government will resign. Any indication of resignation intentions could bring the crucial US-Japan trade negotiations to a sudden halt, making it nearly impossible to complete negotiations before the August 1 deadline.

The report warns that the US may raise its so-called "reciprocal tariff" rate on Japanese imports from 10% to 25%, and stock market participants are likely to react negatively to this. This tariff increase will directly impact the profitability of Japanese export companies.

According to CCTV News, on Monday, July 7, Eastern Time, Trump posted a letter to Japanese Prime Minister Shigeru Ishiba on social media, stating that the US would impose a 25% tariff on all Japanese products starting August 1, 2025. This tariff rate is one percentage point higher than the initially announced 24%.

If the Majority is Lost: Potential Shift to Looser Fiscal Policies by a "New Government"

If there is a change in government, Nomura predicts that even if the ruling coalition loses its majority in the Senate, the Liberal Democratic Party and Komeito may still continue to govern, as the House of Representatives has priority in the nomination of the Prime Minister, and the ruling coalition remains the largest political camp in the House of Representatives.

According to a public opinion poll conducted by "Sankei Shimbun" and FNN from June 14-15, potential candidates for the presidency of the Liberal Democratic Party include Minister of Agriculture, Forestry and Fisheries Shinjiro Koizumi, former Minister for Economic Security Sanae Takaichi, former Foreign Minister Taro Kono, and Chief Cabinet Secretary Yoshihide Suga In terms of fiscal policy, Nomura Securities reports that the potential new government is expected to adopt a more moderate fiscal stance. The report points out that most candidates in last year's Liberal Democratic Party presidential election indicated that fiscal policy would depend on economic conditions, thus a more accommodative tone in fiscal policy is anticipated. The report predicts the introduction of policies aimed at increasing disposable income for households, including raising welfare benefits, reducing social insurance fees, and abolishing the temporary gasoline tax rate.

Market Impact: Yen Depreciation, Divergent Stock Market Effects

Nomura analyzes that if the ruling coalition loses, it will have a differentiated impact on the stock market. On one hand, political uncertainty and the interruption of US-Japan negotiations will dampen market sentiment; on the other hand, expectations of fiscal stimulus from the potential new government and the delay in interest rate hikes by the Bank of Japan will provide support for the market.

Specifically, the timeline for interest rate hikes by the Bank of Japan will be pushed back, which may lead to a depreciation of the yen against the dollar, benefiting export-oriented sectors but putting pressure on financial stocks. Nomura's previous report mentioned that the Bank of Japan originally planned to raise interest rates after confirming that the economy had bottomed out, but the political upheaval will complicate policy-making.

The Japanese elections bring uncertainty, and current traders have shifted to shorting the yen.

An article from Wall Street Insight stated that the upcoming Japanese Senate elections are becoming the focus of traders, with significant changes in the options market, where the trading volume of bullish options for USD/JPY has increased dramatically, more than doubling the volume of bearish options as of July 11. Analysts say that the lack of progress in US-Japan trade negotiations and fiscal concerns are "worsening market sentiment towards the yen."

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at their own risk