Synopsis:

BofA warns that Japan’s upcoming Upper House election, potential US-Japan trade deals, and limited fiscal space could skew risks toward a weaker JPY over the summer.

Key Points:

• Election Season Uncertainty:
  A US-Japan trade agreement could modestly boost approval ratings for the Ishiba administration, but uncertainty over economic measures and voter response remains.

• No Supplementary Budget (Yet):
  The government has held off on a stimulus package, but growing pressure from constituents to respond to US tariffs may trigger fiscal pledges closer to the election.

• Limited Fiscal Room:
  Unlike Germany, Japan has limited capacity for fiscal expansion due to its very high debt-to-GDP ratio, raising the risk of a fiscal risk premium on JGBs.

• Tariff Relief May Be Partial:
  Even if a deal is reached, effective tariffs are expected to remain higher than pre-2025 levels, sustaining pressure on the economy and currency.

Conclusion:

With election-driven policy uncertainty and fiscal constraints, JPY may face downward pressure in the months ahead—even if trade tensions ease—particularly if investors begin to price in political instability or fiscal strain.