Core Viewpoint - Japan is facing a significant Senate election that could impact the ruling coalition led by Prime Minister Shigeru Ishiba, amid a historic sell-off of government bonds and declining support for the ruling party [1] Group 1: Market Reactions and Scenarios - Scenario 1: If the ruling coalition retains a majority, it would be favorable for Japanese government bonds and the yen, despite Japan's high debt burden of approximately 250% of GDP, which is showing a declining trend [1] - Scenario 2: The most likely outcome is that the ruling coalition fails to secure the necessary 50 seats, leading to a potential partnership with the National Democratic Party, which advocates for reversing the Bank of Japan's policies [2] - Scenario 3: A strong performance by opposition parties could have the most significant negative impact on the Japanese market, with major opposition parties supporting some form of consumption tax reduction [2] Group 2: Analyst Insights - Barclays analysts noted that if the National Democratic Party and the opposition party exceed expectations in votes, the yield curve could steepen, with long-term rates rising significantly [3] - Analysts from Societe Generale indicated that a coalition government formed by the opposition could lead to increased government bond issuance to abolish consumption and gasoline taxes, although this scenario has a low probability of about 10% [3]

Core Viewpoint - The upcoming Japanese Senate election poses significant challenges for the ruling coalition, which must secure at least 50 additional seats to maintain a majority in the Senate [1][2]. Group 1: Election Context - The ruling coalition, consisting of the Liberal Democratic Party (LDP) and Komeito, currently holds 75 non-renewable seats in the Senate and needs to win 50 more to maintain a majority [1]. - The election outcome could lead to various fiscal policies, including cash handouts and potential consumption tax cuts, depending on the coalition's performance [2][3]. Group 2: Possible Scenarios - Scenario A: The ruling coalition retains a majority, increasing the likelihood of cash handouts being included in the 2025 supplementary budget, but no consumption tax cuts in the 2026 tax reform proposal [2]. - Scenario B: The ruling coalition slightly loses its majority, leading to potential alliances with opposition parties, which may result in both cash handouts and temporary consumption tax cuts [3]. - Scenario C: A significant loss of majority may force the ruling coalition to include opposition parties, facing pressure for both cash handouts and consumption tax cuts [4]. Group 3: Economic Impact - The cash handout policy, amounting to approximately ¥3.5 trillion (about 0.6% of GDP), is expected to have limited impact on economic growth, with only a projected 0.2% increase in private consumption and 0.1% in GDP [7][9]. - In contrast, a reduction in the food consumption tax from 8% to 0% could lead to a more substantial GDP growth of about 0.5% due to a decrease in the effective consumption tax rate [9]. - Analysts warn that temporary consumption tax cuts may lead to a significant GDP decline of 6% in Q2 2027 when these measures expire, potentially prompting political pressure to extend them [12]. Group 4: Monetary Policy Outlook - Despite uncertainties surrounding the election, expectations remain that the Bank of Japan will raise interest rates in January 2026, maintaining the policy rate unchanged for the remainder of the fiscal year [13].