Core Viewpoint - Moody's indicates that the results of the Japanese Senate elections may hinder the government's efforts to advance fiscal consolidation in the post-pandemic era [1] Group 1: Election Impact - The ruling coalition led by Shigeru Ishiba may need to negotiate with other parties to legislate, increasing the likelihood of implementing fiscal expansion policies to meet the demands of opposition parties [1] - The government may increase spending to alleviate cost-of-living pressures due to public concerns over inflation [1] Group 2: Tax Policy and Credit Rating - The ruling coalition still holds sufficient power to avoid significant adjustments to consumption tax policies [1] - The demands from opposition parties vary widely, from temporary limited tax cuts to complete abolition, with the impact of consumption tax adjustments on credit ratings depending on their scope, magnitude, and sustainability [1] Group 3: Fiscal Risks - Moody's has previously warned that if fiscal deficits continue to widen, leading to a further deterioration of the already high debt burden, it may trigger a risk of rating downgrades [1]

Core Viewpoint - The ruling coalition in Japan is projected to lose its majority in the House of Councillors, which could further weaken Prime Minister Shigeru Ishiba's leadership and disrupt financial markets [2][3]. Group 1: Election Results and Implications - Exit polls indicate that the ruling coalition may secure only 32 to 51 seats out of 125 contested, falling short of the 50 seats needed to maintain a majority in the 248-seat upper house [2]. - Ishiba stated he would continue as Prime Minister, believing the Liberal Democratic Party (LDP) can still remain the largest party in both houses [2]. - If the ruling coalition loses control of the upper house, it would mark the first time since the LDP's establishment in the 1950s that the government holds a minority in both houses [2]. Group 2: Market Reactions and Investor Sentiment - The election outcome may complicate Ishiba's policy agenda and U.S. trade negotiations, potentially leading to his resignation [3]. - Investors are increasingly uncertain about the government's ability to manage fiscal spending, contributing to rising Japanese bond yields, which have reached their highest levels in over 20 years [3]. - The stock and bond markets will be closed on Monday due to a national holiday, with the forex market expected to react first to the election results [3]. Group 3: Public Sentiment and Policy Challenges - Many opposition parties advocating for tax cuts and increased social welfare have resonated with voters, particularly amid rising consumer prices [5]. - The LDP is perceived to be on the defensive regarding key public issues, with most households favoring a reduction in consumption tax to alleviate inflation pressures [5]. - If Ishiba remains in power, the stock market may face downward pressure, while a potential resignation could lead to increased likelihood of tax cuts and a market rebound [5]. Group 4: Legislative Challenges Ahead - Should the ruling coalition lose its majority, Ishiba will need to rely on opposition support for legislation, facing pressure to compromise on tax issues [6]. - Japan must reach an agreement with the U.S. by August 1 to avoid a significant increase in tariffs on exports, which could negatively impact Japan's GDP by 0.9% [6].