Japan’s Political Uncertainty Persists Despite U.S.-Japan Trade Deal

In this explainer piece, Asia Pacific Analyst Soojin examines how Japan’s persistent political instability—despite the recent U.S.-Japan trade deal—combined with escalating tensions in the Asia-Pacific region and potential leadership changes ahead of the next prime ministerial election, is creating policy uncertainty and new risks for the global business environment. 

Image : Reuters 

Executive Summary:   

• US-Japan Trade Deal: Despite concerns that political instability under the Ishiba administration could weaken Japan’s negotiating position, the two countries agreed to reduce tariffs on automobiles and parts from 25% to 15%. Japan also pledged to invest $550 billion in U.S. strategic sectors, including semiconductors, energy, and AI, creating short-term easing momentum. 

• Domestic Political Instability: Despite the trade deal, political uncertainty remains high as the LDP failed to secure a majority in both chambers for the first time since 1955, raising concerns over policy consistency. 

• Opposition Realignment: The rise of the far-right Sanseito party and the gains made by the Democratic Party for the People signal structural changes in Japan’s political landscape, increasing regulatory and economic risks. 

• Leadership Uncertainty: Public polls show Sanae Takaichi (26%) and Shinjiro Koizumi (22%) as the top contenders for the next prime minister, with inflation control and social security emerging as key policy priorities. 

US-Japan Trade Deal Cuts Tariffs to 15%, $550B Investment Pledged 

Following its defeat in the Upper House election on July 20, 2025, the Ishiba administration faced concerns that Japan’s negotiating power with the United States would weaken ahead of tariff talks. However, on July 22, Japan and the U.S. agreed to cut the 25% tariff imposed in April by half, lowering the overall tariff, including the existing 2.5%, to 15%. On the same day, the Trump administration announced the details of the trade and investment agreement reached between the two countries. The agreement includes Japan increasing imports of U.S. rice by 75%, investing $550 billion in key U.S. industries, and purchasing U.S.-made defense equipment. Japanese media reported that this investment will focus on critical economic security sectors such as semiconductors, pharmaceuticals, steel, shipbuilding, critical minerals, aerospace, energy, automobiles, and artificial intelligence. 

However, despite these economic gains, political instability within Japan remains a significant risk, with a lack of policy consistency and the rise of far-right forces likely to create greater uncertainty for businesses and investors in the future. 

How Is Japan’s Political Instability Linked to Uncertainty Risks? 

For the first time since its founding in 1955, the ruling Liberal Democratic Party (LDP) failed to secure a majority in both the Upper and Lower Houses. Notably, this election saw significant gains by the far-right Sanseito party and the center-right Democratic Party for the People, signaling a major shift in Japan’s political landscape. This outcome underscores a serious fracture in the “1955 System,” under which the LDP had long dominated Japanese politics as the primary representative of conservative forces. 

Two main factors contributed to the LDP’s defeat. First, political fundraising scandals severely damaged its image of integrity, leading to a sharp decline in public support. Second, the government’s failure to curb soaring prices—such as the doubling of rice prices—intensified public dissatisfaction. 

The ruling party’s loss, which had sustained the foundation of the 1955 System, has sent shockwaves through Japan’s political sphere, resulting in a realignment of power dynamics within the opposition. 

Opposition Realignment and the Fracture of LDP-Centric Political Order 

Image : NIKKEI Asia 

The latest Upper House election brought a clear shift in Japan’s opposition dynamics. The Constitutional Democratic Party (CDP) retained its position as the largest opposition party with 38 seats, but secured only 22 new seats, narrowing its lead over the Democratic Party for the People (DPP), which gained 17 seats. In the proportional representation segment, both the DPP and the far-right Sanseito each won seven seats, tying for fourth place. Within the CDP, the result was widely seen as a “de facto defeat.” 

The most notable development is the rise of Sanseito, a far-right party founded in 2020. Running on an explicit “Japan First” platform, Sanseito has emphasized nationalist policies such as restricting foreign property purchases. In this election, the party captured 14 seats, including seven through proportional representation, surpassing the ruling coalition partner Komeito (8 seats) and the conservative Japan Innovation Party (7 seats). Party leader Sohei Kamiya has consolidated his support base by framing issues such as employment, inflation, and public safety as the fault of foreign residents. 

These political shifts pose new risks for businesses, including the potential for stricter regulations on foreign investment, challenges in securing labor, instability in the real estate market, and supply chain restructuring. Multinational companies should closely monitor regulatory changes, hedge against yen volatility, and prepare alternative supply chain strategies. 

Leadership Race: Takaichi vs. Koizumi, Ishiba Trails at 8% 

The shifting political landscape is now translating into a leadership race, amplifying uncertainty over Japan’s future policy direction. 

A nationwide poll by The Yomiuri Shimbun found that former Economic Security Minister Sanae Takaichi was considered the most suitable candidate for the next prime minister, receiving support from 26% of respondents. When asked who should lead Japan if an LDP-led government continues, Agriculture Minister Shinjiro Koizumi ranked second with 22%, while incumbent Prime Minister Shigeru Ishiba trailed at 8%. Meanwhile, 14% of respondents said “no suitable candidate.” By party affiliation, Takaichi was the most favored among opposition supporters, while Koizumi held the lead among LDP supporters. 

When asked which policies the next prime minister should prioritize, respondents selected “measures against rising prices” as the top priority (88%), followed by “pensions and social security” (78%), “diplomacy and security” and “education and child-rearing” (73% each), and “politics and money issues” (68%). Policies on foreigners ranked eighth at 54%. For those who favored Takaichi or Koizumi as the next prime minister, inflation control was the highest priority for both groups. However, Takaichi’s supporters cited “diplomacy and security” as their second priority, while Koizumi’s supporters prioritized “pensions and social security.” 

Foreign Policy Challenges and Risks for Japan’s Next Prime Minister 

Japan’s political leadership vacuum and policy priority shifts following a change in government are likely to significantly impact its foreign policy stance. This could add uncertainty to foreign investment and financial markets. Although the recent U.S.-Japan tariff agreement which lowered tariffs from 25% to 15% helped create a short-term sense of relief, domestic economic difficulties and declining public trust in the government mean that medium- to long-term risks remain. Amid rising tensions in the Asia-Pacific region, the next Japanese prime minister will face the critical challenge of reinforcing Japan’s role on the global stage while managing an unstable domestic political base, the China-Taiwan conflict, intensifying U.S.-China strategic rivalry, and the stability of the U.S.-Japan alliance. 

Japan’s political instability and leadership vacuum are amplifying policy uncertainty and weighing on foreign investor sentiment, driving increased volatility in financial and currency markets. Following the LDP’s loss of its Upper House majority, the yen strengthened and Japanese Government Bond (JGB) yields surged, reflecting heightened market anxiety. Looking ahead to upcoming election outcomes, investors should prepare for medium- to long-term fiscal and policy risks associated with Japanese assets. 

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