LDP Likely Lose Control of the Japan Upper House

On the 20th July, half of the seats for Japan's Upper House are up for election. The LDP and its coalition were originally holding 141 seats as a ruling majority but as early exit polls are suggesting, they are set to lose that majority. 75 out of the 141 seats are not contested in this election and the LDP coalition will need to win at least 50 seats to remain in majority. Moreover, there seems to be little interest for smaller parties to work with the LDP for their concern on difference in political agenda and credibility from the ruling parties. 

Rising living cost & rising foreign workers are key reason for voters' change of heart, driving a historic 21.5 million voters to cast their ballot. The latest surge in rice price from 2024-2025 have been a big blow to the ruling LDP coalition, despite their effort to steady prices by releasing the emergency rice reserve. To deal with the pressure of living, the current government is suggest a cash handout while the opposition's idea of consumption tax cut seems to have gained more traction among voters. 

There is also a rising far right party, Sanseito, that mimics Trump political style and is attracting voter's attention in this election. They are forecasted to win at least 11 seats from only 2 seats in the last election. The party, hailing "Japan First", is selling the idea of tax cut, increasing welfare and anti-foreigner sentiment. Anti-foreigner sentiment is also trending, with the cheap JPY attracting more global tourist. The aging population and birth tendency also see a higher percentage of foreigner babies and new residents, roughly contributing to 3% of the total population. While it is understandable for voter's support amid high inflationary pressure, the fiscal health of the Japanese government may limit the magnitude of stimulative policy.

Japanese PM Ishiba is now facing double headwinds from political pressure to step down and the tariff negotiation with the U.S.. The U.S.-Japan tariff negotiation remains critical as it not only put the Japanese auto industry on the edge, but also keeping BoJ's hand tied. It is hard to see the BoJ to further tighten without any clarity on the trade front, thus inflationary pressure will have a hard time to be eased from the help of interest rate. In the foreseeable future, if Ishiba decided not to step down, it will be his utmost priority to make a deal with the U.S..