Watch Economic Observatory / Will the ruling party's defeat in the House of Councillors election accelerate the yen's depreciation? Will Trump's tariffs also lead to a decline in consumption?

The 27th regular election for the House of Councillors was held on July 20, 2025. As a result, the ruling Liberal Democratic Party and Komeito lost their majority with 122 seats, while the Democratic Party for the People and the Party of Councillors saw gains. If fiscal policy reverses and political turmoil sets in, there are concerns that the yen will weaken again. How will the ruling party's crushing defeat in this election affect the outlook for the economy and the luxury watch market? Leading economic journalist Tomoyuki Isoyama offers his analysis.

Will the ruling party's defeat in the House of Councillors election accelerate the yen's depreciation? Will Trump's tariffs also lead to a decline in consumption?

　The ruling coalition of the Liberal Democratic Party and Komeito suffered a major defeat in the House of Councillors election, losing their majority. With the ruling coalition now in the House of Councillors, just as it was in the House of Representatives, the political situation is expected to become even more chaotic. While Prime Minister Shigeru Ishiba has declared that he will continue in office, it is undeniable that his unifying influence has weakened.

　The Democratic Party for the People and the Democratic Party for the People made great strides in the House of Councillors election. They are calling for increased take-home pay for the working generation and a reduction in the consumption tax, raising the possibility that they will join other opposition parties in pushing for tax cuts as a measure to combat rising prices. If concerns grow that Japan's finances will worsen further, this could lead to a loss of global confidence in Japan's finances, which could lead to a renewed weakening of the yen.

Will the worsening finances lead to a further weakening of the yen?

　The "real effective exchange rate," released monthly by the Bank of Japan, indicates the strength of the yen against other currencies, and as of May 2025 it was 74.55 (with 2020 as the base year). The yen's most recent weakness was 68.27 in July 2024, which means it has strengthened since then, but it is still weaker than the 75.09 level in January 1970. At the time, the yen-dollar exchange rate was 1 US dollar = 360 yen, so the effective yen rate is weaker than it was then. It's no wonder people feel that Japan has become poorer.

　If the outcome of this election leads to the implementation of a series of policies that will worsen the national finances, such as the payment of subsidies and tax cuts, the real effective exchange rate is likely to begin to fall again towards the 68.27 level seen in July of last year. Policies are being implemented that weaken the US dollar itself as an exchange rate, so it is difficult to predict what will happen to the yen-dollar rate, but there is a possibility that the yen will weaken further.

　This could lead to further increases in the prices of imported goods. Fiscal spending to combat rising prices could result in a further weakening of the yen, leading to higher import prices, creating a vicious cycle.

　Up until now, the Japanese economy has been benefiting from the increase in the number of foreign visitors to Japan due to the weak yen and the increase in inbound consumption, but if prices continue to rise, there is a growing possibility that this will have a negative impact on domestic consumption, and the domestic economy could begin to deteriorate in earnest.

Swiss watch exports to Japan come to a sudden halt

　The recent sudden slowdown in Swiss watch exports to Japan may be a sign of this economic downturn. According to statistics from the Federation of the Swiss Watch Industry (FH), exports to Japan in June 2025 totaled 155.6 million Swiss francs (approximately ¥287 billion), down 11% from the same month last year. Cumulative exports from January to June totaled 931.5 million Swiss francs (approximately ¥172 billion), surpassing the totals for mainland China and Hong Kong, placing Japan second only to the United States. However, this was due to significant declines in exports to mainland China (down 18.7%) and Hong Kong (down 13.3%), while exports to Japan itself were down 3.2%. Exports to the United States increased 20.4% cumulatively, seemingly driving global consumption. However, total global exports of Swiss watches fell 0.1% compared to the same period last year, indicating a rapid slowdown in the global economy.

　Needless to say, the impact of Trump's tariffs is significant. On July 23rd, US President Trump announced on social media that an agreement had been reached to impose a 15% tariff on Japan, effective August 1st. The fact that the tariff was lower than the initially expected 25% has been welcomed by the market, with the Nikkei average stock price rising significantly. However, with a high 15% tariff being imposed on automobiles and other export items, it is certain that this will have a major impact not only on Japanese exports to the US, but also on the global economy.

　Assuming that Japan's exchange rate continues to move in the direction of a weaker yen for the time being, an optimistic scenario could suggest that this will lead to a further increase in inbound tourists and boost consumption. On the other hand, a pessimistic view could suggest that the weak yen will cause prices to rise, which will quickly cool the domestic economy and, as a result, lead to a decline in consumption. In either case, the situation is difficult to predict. Will consumption of luxury watches and other high-priced items by foreign visitors to Japan continue to grow, or will it plateau? The next few months are likely to be a turning point.