The Japanese yen strengthened on Monday after Prime Minister Shigeru Ishiba pledged to remain in office despite his ruling coalition's loss of a majority in the country's upper house. The development, while politically destabilizing, had largely been priced in by investors, who now turn their focus to looming trade deadlines, particularly with the United States.
The yen rose 0.8% to 147.65 per dollar, recovering slightly from last week's 3-1/2-month low of 149.19. It also gained ground against the euro at 172.10 and the British pound at 198.87. Japanese markets were closed for a national holiday, but the yen served as a key barometer of investor sentiment amid increasing political and trade-related uncertainty.
Prime Minister Ishiba's Liberal Democratic Party secured 47 seats in Sunday's election, falling short of the 50 needed for a majority in the 248-seat chamber. "It remains unclear whether Ishiba can indeed survive as the prime minister... and what it means for Japan's trade negotiations with the U.S.," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. She added, "Prolonged political uncertainty will be negative for Japanese assets, including the yen."
Despite calls within his party for leadership change and reports of the opposition preparing a no-confidence motion, Ishiba reiterated his intention to stay. Analysts said his commitment offered temporary reassurance to markets, though questions linger over Japan's economic path and fiscal stability.
Investor attention now turns to the August 1 deadline set by President Donald Trump for new U.S. tariffs on Japan and the European Union, should no trade agreement be reached. "Japan's political picture has become more complicated, with investors also focusing on the U.S.-Japan tariff row," said Roberto Mialich, global FX strategist at UniCredit.
U.S. Commerce Secretary Howard Lutnick told CBS News on Sunday he was "confident" the U.S. can reach a deal with the EU, but stressed that August 1 remained a hard deadline. EU diplomats have signaled readiness to escalate retaliatory measures if negotiations falter.
"Realistically, there is a high probability that uncertainty will persist beyond August 1," said Jochen Stanzl, chief market analyst at CMC Markets. Investors are increasingly cautious as global trade tensions mount, compounded by the possibility of renewed volatility in central bank policy.
The European Central Bank is expected to hold interest rates at its meeting this week, while the Federal Reserve, pressured by Trump to ease policy, is widely expected to stand pat at its July gathering. "We doubt ECB President Christine Lagarde will shake things up too much ahead of the central bank's summer break," noted Chris Turner, global head of markets at ING.
Stock markets reflected the uncertainty. London's FTSE 100 fell 0.1% to 8,985.46, Paris' CAC 40 slid 0.6% to 7,779.41, and Frankfurt's DAX dipped 0.2% to 24,233.13. Meanwhile, Asian stocks posted gains, with Hong Kong's Hang Seng Index up 0.7% at 24,994.14 and Shanghai's Composite Index also rising 0.7% to 3,559.79, boosted by strong earnings from Taiwan's TSMC and signs of U.S. regulatory relief for Nvidia.
U.S. equities closed lower Friday, with the Dow Jones Industrial Average down 0.3% at 44,342.19. The dollar index dropped 0.3% to 98.107, as the euro climbed to $1.1658 and the pound edged up to $1.3467. The New Zealand dollar slipped 0.1% to $0.5964 after inflation data came in below expectations.
