Japan’s Coalition Loss Sparks Fiscal Fears Amid Bond Turmoil

- Ruling coalition loses upper house majority, raising economic and policy questions. - Bond yields surge and yen fluctuates amid looming tax cuts and U.S. trade talks. On July 20, 2025, Reuters reported that Japan's ruling coalition, led by Prime Minister Shigeru Ishiba, lost its majority in the upper house of parliament following Sunday’s election. This loss marks the first time the Liberal Democratic Party (LDP) has failed to control both chambers since the party's founding in 1955. Although markets anticipated this outcome, it has intensified uncertainty around the government's fiscal and policy direction, compounding concerns over the country's enormous budget deficit. On July 17, 2025, Cryptopolitan noted that bond markets were already strained by fears of increased government spending. With public debt at approximately 250% of GDP—the highest among major economies—Japan’s fiscal landscape now appears increasingly precarious. Opposition parties have championed a five-point cut to the consumption tax. According to analysts at Barclays, this measure could elevate 30-year bond yields by 15 to 20 basis points, which would further inflate the nation’s debt servicing costs. On July 20, 2025, Reuters also reported that Japanese government bonds sustained a major sell-off before the election, causing 30-year yields to hit record highs and the yield curve to steepen dramatically. Since January, yields on 30-year Japanese Government Bonds (JGBs) have jumped by 80 basis points, an increase that reflects growing anxiety about fiscal sustainability and potential credit rating downgrades. Meanwhile, the yen has been volatile amid these developments. Earlier in the year, it depreciated significantly due to concerns over a widening budget deficit and anticipated tax hikes. The U.S. has also threatened to impose a 25% tariff on Japanese exports starting August 1. This threat gives trade negotiations heightened importance and could exacerbate tensions in the currency market. Politically, the ruling coalition faces a critical crossroads. Despite speculation about his resignation, Prime Minister Ishiba has announced he will remain in office, but this leadership uncertainty could fuel further market instability. If a transition occurs, LDP member Sanae Takaichi is a likely contender for the premiership. The coalition is now attempting to form alliances with other parties, such as the Democratic Party for the People (DPP). If they collaborate, the DPP’s platform of monetary easing and tax cuts could significantly shape policy debates. In contrast to the bond and currency markets, Japan’s equities sector has performed robustly. Corporate optimism has lifted the Nikkei 225 more than 11% since April, despite broader economic challenges. This resilience suggests investors are pinning hopes on firms’ ability to navigate the uncertain macroeconomic environment. On July 20, 2025, at 12:00 UTC, CoinMarketCap reported that Bitcoin (BTC) was trading at $29,514, with daily volume up 4.5%. In addition, Ethereum (ETH) was trading at $1,867, experiencing a 3.1% drop in daily volume.