According to Moody’s, the outcomes of the upcoming upper house elections in Japan on July 20 could significantly influence both policy and the nation’s financial future. With public debt soaring to over 260% of GDP, the highest level among advanced economies, the stakes are incredibly high.
Ageing population? Check. Sluggish tax reforms? Still pending. The ruling Liberal Democratic Party (LDP), led by Prime Minister Fumio Kishida, has promised to walk a tightrope: continue stimulus while inching toward debt reduction. But critics call this wishful thinking. They say Japan must act now.
Moody’s issued a pointed warning: if political outcomes derail fiscal discipline, Japan’s credit rating could take a hit. And not just symbolically. Investors are already uneasy.
The opposition isn’t quiet. They argue that the government’s dual strategy, spend now, fix later, delays the inevitable. Some propose immediate overhauls. Tax codes. Subsidy cuts. A fiscal reboot.
In fact, in the opinion of Hirofumi Yoshimura, co-representative of the opposition Japan Innovation Party, the Asian giant must diversify trade ties beyond the American market to mitigate risks and focus on partnerships with countries that favour free trade.
Yoshimura said that Tokyo should seek a “win-win” situation in trade negotiations; however, tariffs imposed by President Donald Trump show how the United States is a country risk for Japan or a source of uncertainty that could hurt its economy.
“Japan should expand trade ties with countries that focus on free trade, such as Europe, and leave itself more options to protect its economy. Instead of standing on just one big pillar like the US, Japan should stand on, say, five to 10 smaller pillars. That is a better approach to avoid its roof from falling off,” he told Reuters in an interview.
The remarks came as Japan faces the risk of sustained, steep tariffs from Uncle Sam after stalled trade talks led to Trump’s criticism that Japan was engaging in “unfair” automobile trade.
Meanwhile, global markets watch and wait. Analysts say the election outcome could either sharpen or blur Japan’s economic direction. A commanding win for PM Fumio Kishida’s coalition? That could greenlight tough reforms: tax hikes, programme reviews, maybe even a timeline for balancing the books. But if the coalition loses ground or ends up in a political deadlock, inertia might win again.
“Japan still has buffers,” Moody’s noted. Domestic investors. Low interest rates. Monetary cushioning. But confidence is fragile. If inflation creeps up or political will crumbles, those cushions won’t hold.
“This isn’t just another election. It is a referendum on Japan’s economic future,” a Moody’s analyst said.
The results, expected shortly after polls close on July 20, could ripple beyond Tokyo. Markets will react swiftly. But the real test will be whether Japan can or will chart a sustainable fiscal path before pressure becomes a crisis.