Yen edges higher as Japan election reshapes political outlook

Yen gains modestly as Japan enters new political phase

The Japanese yen started the week with slight gains, with USD/JPY edging down toward the low-148s. Currency markets remained calm, with major pairs confined to Friday's ranges, as traders absorbed the outcome of Japan’s upper house election. The Liberal Democratic Party (LDP) and its allies lost their majority for the first time in 70 years — a symbolic turning point that nonetheless had limited immediate market impact.

Prime Minister Shigeru Ishiba confirmed his intention to stay in office despite the defeat, vowing to govern with support from centrist and left-leaning opposition parties. Markets interpreted the result as a signal for looser fiscal policy ahead, a likely attempt to shore up public support and economic momentum. That could ultimately weigh on the yen, especially if combined with delayed monetary tightening from the Bank of Japan.

Historically, political instability in Japan tends to keep the BoJ cautious. With Ishiba weakened and the upper house fragmented, aggressive policy shifts are unlikely in the near term. The political gridlock could also increase uncertainty around future budget approvals and spending plans.

U.S. trade deadline looms as global tariff risk grows

U.S. Commerce Secretary Howard Lutnick reiterated Sunday that the August 1 deadline for new reciprocal tariffs remains firm. He clarified that countries can still negotiate—but only after the new rates are in effect. This hardline stance underscores Washington’s pivot toward bilateral enforcement and away from multilateral trade frameworks.

Smaller countries, particularly in Latin America and Africa, will face a minimum 10% baseline tariff. Larger economies, including Japan, the EU, and Canada, are under pressure to offer greater market access or face harsher trade terms. The tariff structure is seen as a political tool to incentivize bilateral deals ahead of U.S. elections.

With global supply chains already under pressure, these tariffs risk adding friction to cross-border flows and could dampen investor confidence. For the yen, this backdrop may trigger safe-haven bids in the short term, but trade-sensitive currencies remain vulnerable if escalation persists.

China holds rates steady amid weak growth

The People’s Bank of China kept its benchmark lending rates unchanged at record lows during the July fixing, maintaining the 1-year loan prime rate at 3.0% and the 5-year rate at 3.5%. The decision came amid mounting pressure from U.S. tariffs, tepid domestic demand, and ongoing weakness in the real estate sector.

Despite recent fiscal easing, authorities remain reluctant to flood the economy with stimulus. By holding rates steady, the PBoC signaled its preference for stability over aggressive easing, likely awaiting more data before taking further action. The yuan remained range-bound following the decision.

Brent crude flat as sanctions tension offsets supply worries

Brent crude oil hovered near $69.20 per barrel, showing little reaction to the European Union’s new sanctions package targeting Russian oil exports. The 18th round of EU sanctions includes a reduced price cap, banking restrictions, and a ban on exports to a major Indian refinery.

These measures followed U.S. President Trump’s threat last week to sanction buyers of Russian oil unless Moscow agrees to a peace deal within 50 days. While the geopolitical backdrop remains tense, markets appear cautious rather than reactive—balancing supply risks against the broader demand outlook, which remains clouded by global trade frictions.

ECB on hold, focus turns to September projections

The European Central Bank is widely expected to leave its deposit rate unchanged at 2.00% this week, maintaining a pause after a year-long easing cycle. According to a Reuters poll, 58% of economists expect one final 25bp cut in September, while others believe the current rate is already the floor.

Markets will closely monitor ECB President Christine Lagarde’s comments for clues on how tariff-related uncertainty and inflation dynamics are shaping the bank’s outlook. With updated staff projections due in September, that meeting may offer clearer forward guidance.

What to watch this week

• Tuesday:

RBA meeting minutes

UK public sector borrowing data

• Wednesday:

Canada new housing price index

US existing home sales

• Thursday:

Australia, Japan, Eurozone, UK, and US PMIs

ECB rate decision

Canada retail sales

US jobless claims and new home sales

• Friday:

Japan Tokyo CPI

UK retail sales

Germany Ifo business climate index

US durable goods orders