Japan’s Upcoming Election: LDP Faces Potential Loss in Upper House Amid Economic Challenges

Japan is set to hold elections for the House of Councillors, the upper house of its National Diet, on July 20, 2025. Recent opinion polls suggest that Prime Minister Shigeru Ishiba's ruling Liberal Democratic Party (LDP) may lose its majority in the upper house, following a previous loss in the lower house in October 2024. This potential shift could empower opposition parties advocating for tax cuts and looser monetary policies, complicating the Bank of Japan's (BOJ) efforts to normalize interest rates amid rising inflation and external economic pressures.

The House of Councillors consists of 248 members, with half elected every three years for six-year terms. In the upcoming election, 124 seats are up for grabs. The LDP, which has governed Japan for most of the post-war period, faces significant challenges. In October 2024, the party lost its majority in the House of Representatives, leading to a minority government under Prime Minister Ishiba. Since then, the administration has struggled to pass legislation without opposition support.

Opposition parties, including the Constitutional Democratic Party (CDP) and the Japan Innovation Party, have been gaining traction. These parties advocate for tax cuts and more accommodative monetary policies to stimulate the economy. The CDP and the Japan Innovation Party have attempted to unify their efforts by holding opposition primaries in several prefectures to consolidate support against the LDP.

The BOJ has been navigating a complex economic environment. In January 2025, the central bank raised its short-term policy interest rate to 0.5%, the highest level since 2008, citing higher wages and inflation. However, the BOJ has adopted a cautious stance on further rate hikes due to uncertainties, including potential economic damage from newly imposed U.S. tariffs. Former BOJ policymaker Makoto Sakurai indicated that the BOJ is expected to delay any further interest rate hikes until at least March 2026 due to these uncertainties.

Japan's core consumer inflation reached 3.7% in May 2025, significantly exceeding the BOJ's 2% target. Food prices rose by 7.7% during the same period. Despite this, the BOJ views underlying inflation as still below target. The central bank is contemplating an upward revision to its inflation forecast for fiscal 2025, driven by persistent increases in rice and overall food prices. However, it is expected to maintain projections for fiscal 2026 and 2027, citing ongoing uncertainty around U.S. tariffs and their potential impact on Japan's economy.

U.S. President Donald Trump recently announced increased tariffs affecting 14 nations, including Japan, with a deadline of August 1. This trade pressure and stalled negotiations between Japan and the U.S. could lead the BOJ to downgrade its growth forecasts in July. Sakurai highlighted that the central bank is closely monitoring business sentiment and wage outlooks and is unlikely to raise rates until confirming economic resilience.

The potential loss of the LDP's majority in the House of Councillors could further complicate the BOJ's plans to normalize monetary policy. Opposition parties advocating for tax cuts and looser monetary policies may challenge the central bank's efforts to raise interest rates. Analysts warn that these political dynamics, along with external threats like U.S. tariffs, may prolong the BOJ’s pause in rate hikes and fuel market volatility.

The upcoming election has significant implications for Japan's economic policy and the BOJ's strategy. Monitoring political developments and their impact on monetary policy is crucial. The intersection of domestic politics and external economic pressures will shape Japan's economic trajectory.