Japanese Yen gains after Japan elections, Asian stocks dip

The Yen recouped some of last week’s losses as investors weighed the extent of the defeat suffered by Japan’s ruling coalition in the weekend’s upper-house election. Asian stock markets edged down.Japan’s currency had dropped for two weeks, and bond yields spiked ahead of the vote on concern that a poor showing by Prime Minister Shigeru Ishiba would open the door to more spending and tax cuts. While the ruling Liberal Democratic Party and its partner lost their majority in the chamber, their final tally may be enough to keep Ishiba in the job.

“Some investors had positioned for a larger setback for the coalition and even anticipated Ishiba’s resignation,” said Akira Moroga, chief market strategist at Aozora Bank. “The unwinding of such positions, combined with relief that a political risk event has passed, contributed to the initial yen rebound.”

Elsewhere, the MSCI Asia Pacific Index declined 0.2% as stocks in Australia and Taiwan retreated while those in South Korea advanced. US equity-index futures edged up 0.1% while oil gained 0.3%. Gold was steady.Japan’s currency strengthened as much as 0.7% against the dollar, before paring gains. The country’s financial markets are shut for a holiday Monday, which means there is no trading of local stocks, or cash Treasuries in Asian hours.

Ishiba said he intends to stay on despite the defeat. Traders are focused on how the political uncertainty may play out as this is the first time since 1955 that a leader from the storied Japanese party will govern the country without a majority in at least one of the legislative bodies.“Uncertainty usually tends to favor the yen, at least initially,” said Rodrigo Catril, a currency strategist at National Australia Bank in Sydney. “Overall, the election outcome is not good news for Japanese assets and we would look to fade yen strength.”

Meanwhile, US President Donald Trump pushed back on a report that Treasury Secretary Scott Bessent advised that markets would react badly if he fired Federal Reserve Chair Jerome Powell.

“Powell’s removal as Fed Chair remains unlikely, and even in such a scenario, it is hard to see the other governors voting for cuts if the economic backdrop didn’t warrant them,” Barclays strategists including Themistoklis Fiotakis wrote in a note to clients. “Outside of this headline noise, there have been signs of dollar consolidation, perhaps as a reflection of a changing reaction function to tariffs by markets.”

On tariffs, European Union envoys are set to meet as early as this week to formulate a plan for measures to respond to a possible no-deal scenario with Trump, whose tariff negotiating position is seen to have stiffened ahead of an Aug. 1 deadline.

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