Yen Surges After Ruling Coalition's Defeat; Analysts Remain Bearish on Yen and Japanese Stocks

TradingKey - Following a significant defeat in the upper house elections where Japan's ruling coalition lost its majority, the yen surged amidst looming US-Japan tariff negotiations. Analysts believe the political uncertainty will lead to increased volatility in Japanese stocks and the yen.

On Monday, July 21, local time, the dollar-yen pair opened with a sharp decline, followed by a slight recovery and afternoon fluctuations, ultimately down 0.75% at 147.67 by the time of publication. Analysts attribute the yen's initial surge as a safe-haven asset to investors' flight to safety amid political uncertainty, with the subsequent pullback suggesting the election results have been priced in. Japanese stock and bond markets were closed for a holiday on Monday.

USD/JPY trend, source: TradingKey

Despite the yen's rise, several investment bank strategists remain bearish on its outlook. 

Hebe Chen, an analyst at Vantage Markets in Sydney, expressed concerns over Japan's political uncertainty, noting that the election results exacerbate uncertainty, and combined with the upcoming tariff negotiation deadline, will further pressure the yen.

Kristina Clifton, Senior Economist and Currency Strategist at Commonwealth Bank of Australia, emphasized that heightened political uncertainty could drive Japanese government bond yields higher, negatively impacting the yen. She added that Japan's government debt levels are already the highest among major developed economies.

Additionally, Rodrigo Catril, Currency Strategist at National Australia Bank, noted that the ruling coalition's electoral defeat, which prevents it from independently advancing legislation, could widen fiscal deficits. Moreover, a potential delay in Bank of Japan rate hikes might occur. Thus, while uncertainty initially benefits the yen, "the election outcome is not good news for Japanese assets and we would look to fade yen strength.”

The impact on Japanese stocks is more complex. Hebe Chen mentioned that while yen depreciation might provide short-term support, long-term political turmoil could undermine investor confidence.

Furthermore, one of the election's biggest winners, the populist far-right "Party for Civic Participation," could alter Japan's political landscape and introduce unpredictability to upcoming US-Japan trade talks, affecting both the yen and Japanese stocks. Investors remain focused on developments in Japan's political scene.