The Japanese yen declined in Asian markets on Tuesday, erasing some of the strong gains it posted against the US dollar in the previous session, as investors digested the results of Japans upper house elections. Meanwhile, broader Japanese markets showed a muted response after reopening from Mondays public holiday.

Last weeks inflation data out of Tokyo showed a softening in price pressures, which in turn reduced expectations for a rate hike by the Bank of Japan in July.

The Price

USD/JPY Today: The US dollar rose by 0.25% against the yen to 147.71, up from the sessions opening level of 147.37. The pair reached an intraday low of 147.20.

Monday Close: The yen gained nearly 1% against the dollar on Mondayits first daily gain in three sessionsafter the ruling party suffered losses in the Japanese elections.

Japans Upper House Elections

Prime Minister Shigeru Ishibas Liberal Democratic Party (LDP) secured 47 seatsfewer than the 50 needed for a majority in the 248-seat upper house, in elections where half the seats were contested.

The results were not worse than expected, shifting investor attention toward Tokyos ability to reach a timely trade agreement with Washington and the political fate of Prime Minister Ishiba.

Markets offered only a modest reaction to the LDPs loss, with Japanese equities showing limited movement as trading resumed after Mondays holiday.

Analyst Commentary

Hardman, Chief FX Strategist at MUFG Bank, said: The initial relief rally in the yen is likely to be short-lived, as the ruling coalition avoided a more severe defeat and Ishiba appears determined to hold on to power.

He added: However, increasing political uncertainty could complicate Japans efforts to finalize a trade deal with the US, posing downside risks to both the economy and the yen.

BOJ Rate Outlook

Inflation data released on Friday showed that Japans core inflation slowed more than expected in June, suggesting weaker price pressures on the central bank.

As a result, market pricing for a 25-basis-point rate hike by the BOJ in July dropped from 45% to 35%.

Investors now await further data on inflation, employment, and wage growth to reassess the likelihood of future policy tightening.