Japan watchers have seen the country strike a solid trade deal with the US in recent weeks, bringing much-needed certainty to a country still dependent on nascent reflation. At the same time, however, the ruling Liberal Democratic Party (LDP)/Komeito coalition’s failure to secure a majority in Upper House elections has intensified calls for new political leadership.

Following a similar failure in the Lower House last year, there is growing pressure for Prime Minister Shigeru Ishiba to resign, just as he secured a fresh trade deal with the Trump administration. Full details are yet to emerge but broad parameters include a 15% tariff on Japanese exports, including autos, with the 50% level remaining on steel and aluminium for now.

Moving to politics, Japan appears to be the latest country where voters feel ruling parties are failing to help them capitalise on a changing economy and geopolitical landscape. When no credible solutions to complex issues (such as falling real wages, dissatisfaction with freeter¹ /gig jobs and pension concerns) are offered, easy options tend to emerge and immigration became a key campaign topic.

Ishiba’s LDP remains the largest bloc in parliament but now leads a minority coalition in both the Upper and Lower chambers. The party will likely have to choose new leaders, set policy directions, and decide whether to govern as a minority or seek coalition partners.

Markets appear to be pricing in a fragile status quo but underappreciate the potential for either a conservative pivot or a reformist coalition. Meanwhile, the trade deal, though still a headwind for autos and metals, has boosted short-term growth sentiment.

With tariffs lowered and inflation easing, conditions look more favourable for sustained reflation, including real wage growth, and a potential BoJ rate hike by year end. However, political instability and possible reversals on immigration are fresh long-term risks.