Japan will hold upper house elections on Sunday, July 20. This event serves as a mid-term check on Prime Minister Shigeru Ishiba’s coalition, the LDP–Komeito. The election will fill 124 of the 248 seats, following a recent loss in the lower house for the government. Recent polls suggest that the LDP may lose its majority in the upper house, which could create more political and economic difficulties for Japan. Ishiba’s approval rating is at just 34%, as people are facing rising living costs, the effects of U.S. tariffs, and worries about financial stability.

Opposition Strategy

Opposition parties are focusing on increased spending and tax relief, proposing stimulus plans that exceed the government’s ¥3.5 trillion. A change in the upper house could make Japan’s financial situation more complex, impacting the Bank of Japan’s cautious approach and causing market anxiety. If the LDP suffers losses, increased government spending might put pressure on the JGB markets, raising concerns about debt sustainability and credit ratings. The Bank of Japan could have a tougher time communicating if bond market volatility rises. The yen’s value may fluctuate based on election results. A win for the LDP could mean continued policies, while a strong performance by the opposition could lead to short-term political uncertainty, temporarily boosting the yen’s status as a safe haven.

Economic Implications and Strategy

We see this election as a significant risk factor that creates uncertainty around Japan’s fiscal policy. Ishiba’s low approval ratings make sense, given that core inflation has reached 2.5%, while real household spending has fallen for over 14 months. This situation could lead to a potential setback for the ruling coalition. Derivative traders should think about preparing for higher Japanese government bond yields, particularly if the opposition gains traction and pushes for more fiscal stimulus. With the 10-year JGB yield around 1.0%, any indication of expanded government spending beyond the suggested levels could push yields higher, testing the central bank’s commitment. Therefore, we are considering short positions in JGB futures as a strategy against a populist election outcome. For the yen, we anticipate increased short-term volatility, making options strategies like straddles or strangles appealing for capitalizing on price fluctuations. A surprising opposition win could cause a brief rally in the yen from its current low levels near 160 against the dollar, similar to past reactions to political uncertainty. However, any strength in the currency is likely to be short-lived, as the focus will shift back to the interest rate gap between Japan and the United States. A divided government could complicate the Bank of Japan’s messaging, forcing it to respond more directly to bond market fluctuations than usual. We will monitor any unexpected statements or actions from the bank in the weeks following the election. Such events could lead to significant trading opportunities in yen currency pairs and interest rate swaps. Create your live VT Markets account and start trading now.

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