After the results of the Japanese Senate election were announced, the yen strengthened, but the outlook is still facing a double test of tariffs and political situation.

After the ruling coalition in Japan lost its majority in the Upper House, the yen strengthened on Monday. The yen against the US dollar rose to 1 USD to 148.46 yen, but still remained close to the three and a half month low reached last week, indicating investor concerns about Japan's fiscal outlook. As investors prepared for the final deadline for US tariff negotiations, Japan may face a period of policy paralysis and market turmoil. The results of the 27th Upper House election in Japan were announced in the early hours of July 21. The ruling coalition of the Liberal Democratic Party and Komeito lost the majority of seats in the Upper House in this election. In the House of Representatives election held last October, the ruling coalition failed to obtain a majority, becoming a minority government. The ruling coalition also lost in the Upper House election, making the road to Prime Minister Shizo Abe's leadership more difficult. Carol Kong, Currency Strategist at the Commonwealth Bank of Australia, said that the market may have already anticipated a worse outcome for the ruling coalition before the election, so the reaction to the current election results was relatively mild. However, she expressed doubts about whether the yen could continue to strengthen. She said, "It is not clear at this point whether Shizo Abe can hold on to the position of prime minister, and what this means for Japan's trade negotiations with the United States. Long-term political uncertainty will have a negative impact on the yen and other Japanese assets." While the election results did not shock the market, the timing is particularly sensitive for Japan as the country is trying to reach a tariff agreement with US President Trump before the August 1 deadline. Analysts say that if Shizo Abe resigns, political turmoil could be the trigger for foreign investors to sell Japanese stocks and yen.