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Asian stocks firm as investors look to tariff negotiations, earnings
The Japanese markets returned to action after a holiday in the previous session following the weekend's election where the ruling coalition suffered a defeat in upper house elections, although Prime Minister Shigeru Ishiba vowed to remain in his post.
Japanese shares briefly jumped at the open before trading modestly higher, while bonds had a muted reaction as the election results were largely priced in and were not as bad as investors had feared. The yen rallied 1% on Monday, recouping some of the losses from past weeks and was last little changed at 147.46 per dollar on Tuesday.
Kristina Clifton, an economist at the Commonwealth Bank of Australia, said the weakening of Ishiba's leadership will open the door to more fiscal expansion which is negative for Japanese assets, including the yen.
"The bottom line is longer term Japanese government bond yields and JPY can fall if concerns about Japan's fiscal spending deepen."
MSCI's broadest index of Asia-Pacific shares outside Japan hit its highest level since October 2021 in early Asian hours but was last little changed. The index is up nearly 16% this year.
Overnight, the S&P 500 and the Nasdaq notched record-high closes on Monday, lifted by Alphabet and other megacaps ahead of a burst of earnings reports this week.
Investor focus has been on tariff negotiations ahead of the August 1 deadline with the European Union exploring a broader set of possible countermeasures against the United States as prospects for an acceptable agreement with Washington fade.
The most important deals for the global outlook are with the EU and Japan, CBA's Clifton said.
"The USD reaction to the announcement of trade deals with these countries would depend on the details of the deals in our view," Clifton said, noting the dollar could turn down again against the euro and the British pound.
The euro was steady at $1.1689, after rising 0.5% in the previous session but still away from the near four-year high it touched at the start of the month. The single currency is up 13% this year as investors look for alternatives to US assets bruised by tariff uncertainties.
The dollar index measure against six other key currencies was at 97.905. [FRX/]
The rumblings around the Federal Reserve's independence and whether US President Donald Trump will fire Fed Chair Jerome Powell have kept investors on tenterhooks in recent weeks.
Trump appeared near the point of trying to fire Powell last week, but backed off with a nod to the market disruption that would likely follow.
US Treasury Secretary Scott Bessent on Monday said the entire Federal Reserve needed to be examined as an institution and whether it had been successful, further exacerbating worries about the independence of the US central bank.
The Fed is widely expected to hold rates steady in its July meeting but might lower rates later in the year. Market focus will be squarely on Powell's speech later on Tuesday for clues about when the Fed might ease policy.
Goldman Sachs strategists expect the Fed to deliver three consecutive 25-basis-point cuts starting in September, "provided inflation expectations remain in check amidst worries about Fed independence."
In commodities, oil prices edged lower on concerns that the brewing trade war between major crude consumers the US and the European Union will curb fuel demand.
Brent crude futures fell 0.35%, to $68.97 a barrel, while US West Texas Intermediate crude eased 0.31% to $66.99 per barrel. [O/R]
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The cost of basic necessities such as rice has doubled in the past year, and a consumption tax of 10 per cent continues to weigh heavily on consumers. Wages, by contrast, have remained stagnant, leaving many Japanese citizens struggling to maintain their standard of living. This economic squeeze has particularly affected young voters and families, prompting questions about the government's ability to manage the economy. Amid rising living costs and growing inequality, the LDP's campaign promises appeared out of touch with the daily realities of many voters. The economic unease also intersected with cultural and social anxieties, particularly regarding Japan's increasing reliance on foreign labour. The number of foreign workers has surged to around 3.8 million, roughly 3 per cent of the population, driven largely by the country's ageing demographics and labour shortages. 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Disenchanted by stagnant wages, mounting taxes, and a sense that their voices are not heard, many young people turned away from the political mainstream and toward populist alternatives. 'Trump Effect' A key question arising from the election results is whether the so-called 'Trump effect' played a role in undermining Prime Minister Ishiba's leadership. While Ishiba has not openly opposed US influence, he has had to walk a diplomatic tightrope in recent months. His administration has faced increasing pressure from the Trump administration to increase Japan's defence spending beyond 3.5 per cent of GDP, a highly sensitive topic for many Japanese voters. Although Japan has already boosted its military budget, purchased American defence equipment, and increased its contributions to US bases on Japanese soil, the Trump administration has continued to impose punitive trade tariffs. Japan, alongside South Korea, is subject to a 25 per cent tariff bracket under Trump's trade regime, based on claims that Japan has not sufficiently opened its domestic markets, particularly in agriculture and automobiles. STORY CONTINUES BELOW THIS AD In a notable diplomatic rebuke, Japan recently cancelled a scheduled '2+2' security dialogue with the US. While Foreign Minister Iwaya Takeshi did attend a Quad summit in Washington, the Ishiba administration had hoped that a strong showing in the Upper House elections would enhance its leverage in ongoing trade negotiations with both the US and EU. That hope, however, now appears dashed. Post elections, Ishiba said regarding the tariff negotiations with the US, he wanted to talk in person with President Donald Trump as soon as possible to realise an agreement that is mutually beneficial. A Crisis of Confidence Public confidence in Ishiba's ability to manage relations with the US and restore Japan's economic vitality has deteriorated. 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In his absence, political space has opened for new actors to challenge the traditional dominance of the LDP. These parties, while varying in extremity, often focus on a similar set of grievances: inflation, declining real incomes, tax burdens on the young to support an ageing population, and an increasingly lopsided alliance with the United States. Sanseito, in particular, has captured this mood of discontent and used it to craft a narrative that resonates with disillusioned voters. The party's momentum appears to be growing. Last month, it gained an additional seat when a member of another opposition party defected. It had also won three Lower House seats in a by-election in Tokyo last year, further solidifying its presence on the national stage. STORY CONTINUES BELOW THIS AD Looking Ahead While the ruling coalition lost its majority, the LDP remains the largest political force with a total of 101 seats. 'We must understand the responsibility as the leading party and the one we have to fulfil for the nation,' Ishiba said. He also signalled his intention to keep his position after the election, saying, 'I am keenly aware of [my] responsibilities.' Japan's political future is now uncertain. The ruling coalition's dual minority status will complicate legislative efforts and make it harder to implement any coherent agenda. Ishiba's government will likely face increasing internal dissent, coalition instability, and challenges from both the left and right. Whether this leads to early elections, leadership change, or further fragmentation of Japan's political landscape remains to be seen. But one thing is clear: the 'Trump effect'—embodied in both American policy and its global ideological footprint—has found fertile ground in Japan's political soil. As Japan moves forward, the electorate's shift toward populism, nationalism, and economic protectionism may redefine the country's political trajectory—and its place in the world. STORY CONTINUES BELOW THIS AD The author is a former ambassador to Germany, Indonesia, Ethiopia, ASEAN and the African Union. He tweets @AmbGurjitSingh. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost's views.
