06:50 AM EDT, 07/18/2025 (MT Newswires) -- United States Treasury Secretary Scott Bessent is in Osaka on Friday at the World Expo and met with Japan's Chief Trade negotiator Ryosei Akazawa and there is speculation of a possible meeting with Prime Minister Shigeru Ishiba in Tokyo as well, said MUFG.

The lack of headlines indicating progress on trade negotiations suggests momentum has stalled, with the negotiation strategy of the government being questioned, wrote the bank in a note to clients. Japan has been taking a tough stance with an insistence of some give in relation to the 25% auto tariff and this stance isn't yielding any results.

Part of the government strategy is also likely to reflect the difficult timing with the upper house election taking place on Sunday, stated MUFG. Once the election is passed, the government may then be in a position to give way on its tough stance without the risk of political damage being reflected by lost votes and a possible loss of majority in the upper house.

The yen (JPY) has been weakening over this week and last week on two factors -- the 25% tariff confirmed in Trump's letter to Japan last week and polling data that increasingly indicates the prospect of the government losing its majority in Sunday's election, pointed out the bank. The government's popularity continues to wane, in part due to the ongoing cost-of-living crisis.

On Monday an NHK poll revealed PM Ishiba's approval rating fell from 39% in June to 31% while support for the ruling LDP fell from 31.6% in June to 24%. A Kyodo News poll conducted on Sunday and Monday indicated the LDP would win less than 40 seats while New Komeito is expected to win no more than 10 seats. The ruling coalition need to win 50 of the 125 seats being contested to maintain its majority.

A loss of the majority will put pressure on PM Ishiba to step down, although it's believed now that PM Ishiba will resist that attempt to build support with other parties. With most other parties calling for further support for households, speculation of additional fiscal spending will likely see further rises in Japanese government bond (JGB) yields and additional yen selling, added the bank.

A poor election result could also make doing a trade deal with the U.S. more difficult ahead of the Aug. 1 deadline.

The yen is the second-worst-performing G10 currency since the start of last week, so a loss of majority is certainly partially priced, but a lurch through the 150-level is likely if the government loses its majority, according to MUFG. The exit polls are expected to be announced at 8 p.m. local time in Japan on Sunday evening. Monday is a vacation in Japan which could add to uncertainties with the JGB market closed. As a consequence, currency trading liquidity will be less than normal, which could exacerbate moves in early trading on Monday.