What is the impact of Japanese elections on the Bank of Japan's policy? "7/20" shakes the Bank of Japan

1. Introduction: The Fragile Summer of "Politics × Finance"

"The Bank of Japan can only act when politics is quiet." The words spoken by former Governor Kuroda in his retirement interview are once again gaining relevance in the summer of 2025. With the House of Councillors election on July 20 approaching, the ruling party is on the defensive. Prime Minister Ishiba advocates for "balancing an exit strategy with fiscal soundness," but consecutive public opinion polls suggest the ruling party may lose its majority, making the market focus on "political event risk" as the most critical theme.Reuters

2. Election Situation and the Rise of the "Interest Rate Allergy" Opposition

2-1 Weakness of the Ruling Party: Fear of a "Twisted Parliament" Reenactment

The Ishiba administration has already fallen into a minority in the lower house. In the upper house, the ruling party holds 56 of the 124 seats up for election, but losses in closely contested districts are prominent. Daiki Aoki of UBS SuMi Trust points out that "the probability of losing the majority is over 50%."Reuters

2-2 The "Easing Coalition" of Small Parties

・Kaminari Munetoshi, leader of the Sanseito, advocates for continued monetary easing, stating "escaping deflation is the top priority."
・The Japan Innovation Party suggests a supplementary budget of 30 trillion yen under the name of regional revitalization, while stating "interest rate hikes should be gradual."
・Yuichiro Tamaki, leader of the Democratic Party for the People, initially pledged a "temporary reduction of the consumption tax to 5%," but slightly revised it on July 2, saying "it's unnecessary at the current wage increase level," which drew intense criticism on social media.Trend Salad

The increase in votes for these "interest rate allergy parties" could delay the BOJ's interest rate hike schedule.

3. The BOJ's Stalemate: Inflation at 3%, But Unable to Raise Rates

The BOJ raised rates by a total of 0.50% in March and May and is reducing long-term government bond purchases. The core CPI in April was 3.1% year-on-year, and corporate prices remain high, but expectations are high that an additional rate hike at the July meeting will be "almost shelved." The reasons are political and external risks.

1. Tariffs on Japan eyeing Trump's re-election—Fear of yen depreciation and inflation resurgence

2. Fiscal expansion scenario after the House of Councillors election—Increased government bond issuance → upward pressure on interest rates

3. Ruling party defeat → Prime Minister resignation and dissolution of the House of Representatives as a "political drift"

With these three challenges in place, the BOJ's "wait and see until autumn" has become the established course.Reuters

4. The Pulse of Social Media: Hashtags Indicating Public Opinion

4-1 "#ConsumptionTaxReduction" vs "#CashBenefits"

The hashtag with the most posts in real-time searches is "#ConsumptionTaxReduction." At its peak on July 2, compiled by Trend Salad, it recorded 130,000 posts in six hours. The trigger was Representative Tamaki's statement that "tax reduction is unnecessary." In the comments section, there were many voices demanding household protection, such as:

"Ordinary people are suffocating at 10%" (Anonymous Shrimp)
"Funding? Government bond issuance, right?" (Anonymous Egg)

These voices significantly outnumbered those cautious about tax reduction.Trend Salad

4-2 "#NoRateHike"—The Urgency from the Household Side

Despite the spring labor negotiations, real wages remain stagnant, and fixed-rate mortgage users are crying out, "If it goes up another 0.25% this year, we'll go bankrupt." Social media sentiment is yearning for a "combination of tax reduction and interest rate hold," which politicians can no longer ignore.

5. Market Sentiment

• Long-term interest rates: The 10-year JGB surged from 1.23% to 1.46% (compared to the end of June), disliking the ruling and opposition parties' competing giveaway pledges.

• Exchange rates: The dollar-yen is hovering in the 147 yen range. While offset by the decline in US interest rates, demand for yen depreciation options after the House of Councillors election is rapidly increasing.

• Stocks: The TOPIX bank index is flat with "interest margin expectations > long-term bond surge risk."

Dealers say, "Interest rates and stocks can swing 3% depending on politics."

6. Scenario Analysis: Three Futures After the Election

The most likely scenario isB (Major Defeat for the Ruling Party) at 45%. The majority view is that the BOJ will not be able to act for at least nine months.

7. Policy Implications

1. The Risk of "Double Easing" in Fiscal and Monetary Policy
   With the halt in rate hikes and tax reductions, long-term interest rates may rise autonomously, reigniting discussions on "interest rate free float" after the end of YCC.

2. The Revival of Yen Carry
   If the US and Europe enter a rate-cutting cycle globally, the interest rate differential may be limited, but if political instability is involved, the yen will not function as a safe currency, and the flight to foreign currency-denominated assets will continue.

3. The Distortion of Household Burden
   Even if tax reductions are realized, there is a risk that yen depreciation and import inflation will offset the real purchasing power.

8. Conclusion: "The Choice is Made by Voters, Not the Market"

Elections are a festival of democracy and a device that can produce "unforeseen circumstances" in monetary policy. Now that the BOJ has achieved its inflation target, it faces the risk of having the ladder of normalization pulled out from under it. The public opinion expressed in the voting on July 20 will once again rebound into national life through price fluctuations in the financial markets—there is no solution to break this cycle other than to advance fiscal, monetary, and structural reforms in parallel.

"A country where interest rates do not rise will eventually see its currency fall."—The market's cold logic will not wait for political strife.