Japan’s ruling coalition suffered a major setback in the July 20 upper house election, losing its majority and weakening Prime Minister Shigeru Ishiba’s political grip. Despite the loss, financial markets appeared unfazed, with investors saying the outcome was largely already priced in.
But behind the market calm lies the potential for policy gridlock, rising government debt, and a possible shift in Japan’s monetary policy—especially if the weakened ruling bloc is forced to make deals with opposition parties that favor tax cuts and looser economic policies.
The ruling coalition lost its majority in both houses of Japan’s parliament.
Prime Minister Shigeru Ishiba vowed to remain in office, citing the urgency of trade talks with the U.S., which face an August 1 deadline under President Donald Trump’s tariff policies.
The Democratic Party for the People (DPP) and other opposition groups are now pushing for, Lower consumption taxes, Looser monetary policy from the Bank of Japan and More government spending
Markets were closed in Japan on Monday for a public holiday, but, Nikkei futures rose slightly and The yen strengthened modestly after months of volatility.
Earlier, Japanese Government Bonds (JGBs) had plunged, with 30-year yields hitting record highs—driven by fears of higher debt.
“Markets had already priced in the ruling coalition’s losses,” said Rong Ren Goh of Eastspring Investments.
“Now, attention will shift to what deals the ruling party might make, and what that means for the budget and monetary policy.”
⚖️ What’s at Stake?
Japan already has the highest debt-to-GDP ratio among major economies—more than 250%. Opposition parties’ push for tax cuts would require more government borrowing, which could spook bond markets and investors if not carefully managed.
Key risks going forward, includes, Political instability if Ishiba resigns or loses internal party support, Snap elections, which would further delay fiscal planning and Potential conflicts over monetary policy if the Bank of Japan resists calls for renewed stimulus.
“If Ishiba steps down, foreign investors may pull out quickly, and the yen could drop sharply,” analysts warned.
Here’s what could happen next, Scenario and Impact
LDP stays in power alone Policy stagnation, with limited reforms
New coalition with opposition Tax cuts, increased debt, possible BOJ easing
Ishiba resigns Market volatility, yen weakness, potential snap election
Aggressive fiscal stimulus
Boost for construction and domestic spending, but risks inflation and bond sell-offs
Barclays analysts estimate that a 5-point cut in Japan’s sales tax could push 30-year bond yields up by 15–20 basis points, adding pressure on already stressed government finances.
The yen has fluctuated between 140 and 160 per U.S. dollar in 2025.
Large speculative bets on a stronger yen could unwind rapidly if investors see looser fiscal policy or a shift at the Bank of Japan.
Meanwhile, the yield curve is the steepest it has been in years, with the gap between 10- and 30-year bonds now over 150 basis points.
This political shift comes at a sensitive time:
Japan is under pressure to finalize trade negotiations with the U.S.
Inflation remains low, but the Bank of Japan’s January rate hike showed a willingness to gradually tighten policy.
Any change in government or fiscal direction could disrupt this careful balance.
Japan’s ruling party lost big in the latest election.
The Prime Minister is hanging on, but his power is weakened.
Opposition parties want to cut taxes and spend more.
This could mean more debt, possible changes at the Bank of Japan, and instability in the yen and bond markets.
Investors are watching closely, but big shifts may take time to unfold.
