Yen firms as investors gird for political uncertainty

The yen firmed on Monday after Japan’s ruling coalition lost its majority in the upper house as investors braced for a period of policy paralysis and market tumult in the world’s fourth-largest economy ahead of a deadline on tariff negotiations with the US.

The Japanese markets are closed for the day leaving the yen as an indicator of investor angst. Prime Minister Shigeru Ishiba’s Liberal Democratic Party returned 47 seats, short of the 50 seats it needed to ensure a majority in the 248-seat upper chamber in an election where half the seats were up for grabs.

The yen firmed to 148.32 per dollar in early trading, staying close to the 3-1/2-month low it hit last week as the election result was mostly priced in by investors. It firmed a bit against the euro to 172.64.

While the ballot does not directly determine whether Ishiba’s administration will fall, it heaps political pressure on the embattled leader who also lost control of the more powerful lower house in October.

Chris Weston, head of research at Pepperstone, said the LDP coalition could still partner with the Democratic Party for the People (DPP) to get the 50 seats required, and “that is helpful for the yen.”

“However, most importantly, PM Ishiba has been defiant in his stance to stay the course as PM, but his hand has been sufficiently weakened.”

The election result, while not entirely a shock to markets, also comes at a tricky time for a country trying to get a tariff deal with US President Donald Trump before an Aug. 1 deadline.

Japanese government bonds (JGBs) plunged last week, sending yields on 30-year debt to an all-time high, while the yen slid to multi-month lows against the US dollar and the euro.

If Ishiba resigns, the political maelstrom could be a trigger for foreign investors to sell Japanese shares and the yen, analysts said.

Elsewhere, investor focus has been firmly on Trump’s global tariff salvos, with a Financial Times report last week indicating the US president was pushing for steep new tariffs on European Union products.

The euro was steady at USD 1.163225 in early trading, while sterling last fetched USD 1.13417. The dollar index, which measures the US currency against six others, was at 98.352.

The New Zealand dollar eased 0.18% to USD 0.5951 after annual consumer inflation accelerated in the second quarter but stayed below economists’ forecasts, leading markets to raise the chance of a rate cut next month given the broader economic weakness.

In cryptocurrencies, bitcoin fell 1% to USD 116,939, holding below a record USD 123,153 reached last week.

(Reporting by Ankur Banerjee in Singapore
Editing by Shri Navaratnam)