Japan remains firm in its stance, seeking a complete exemption from US tariffs. This decision comes amid the possibility of a snap election, as Prime Minister Shigeru Ishiba governs with a minority in the lower house.

The upcoming House of Councillors election, required by July 22, adds complexity to ongoing negotiations. These political factors create a challenging backdrop for Japan’s trade talks with the United States.

Japan’s Domestic Motivations

What this means is that Japan is pushing for full relief from the tariffs, rather than selective easing or sector-based carveouts. The insistence on total exemption, at this particular moment, suggests a domestically driven motivation—and markets are already reacting with noticeable caution. The Prime Minister’s hold over the lower house is not secure, which feeds unpredictability into policy execution. We’ve seen this before, of course. When leadership lacks parliamentary backing, foreign counterparts may delay or dampen their responses, waiting to see where the political chips fall.

On top of this, the pending upper house election must happen by 22 July, and it’s more than a simple date on the electoral calendar. It has the potential to shift legislative dynamics in ways that would directly affect trade strategy. Where does that leave planned tariff concessions or retaliatory measures from Japan? Likely postponed, possibly reshaped, and in any case, still missing formal confirmation. As traders, we know time windows like these tend to produce low-conviction rallies and unstable support zones—easy to enter, harder to exit cleanly.

What’s more, Matsuda at the Ministry of Economy only last week indicated a willingness to explore a bilateral industrial flexibility clause. That was prior to rumblings of campaign manoeuvring within the ruling LDP. Now, any appearance of compromise risks being seen as weakness by opposition figures hoping to gain ground through voter scepticism around foreign pressure. This kind of internally driven posturing does not show up in headline inflation data but it does show up in trade-weighted yen forecasts, often hidden until too late.

Market Sentiment and Positioning

Derivatives pricing is already showing a shift. Term structure in mid-duration options has flattened modestly while skew has begun pointing increasingly in one direction. Not dramatically, but consistently. When yield control policy intersects with tariff rhetoric, implied volatilities rarely stay compressed for long. We are entering one of those periods where positioning must be more deliberate, rarely large, and always with an exit plan. It’s less about the economic data and more about headline risk feeding directly into price action, skipping any meaningful delay.

Those watching the cross-currency bases will have noticed a mild widening consistent with demand from hedgers anticipating trade friction-fuelled outflows. Sato’s comments from Tuesday—suggesting that markets were ‘not yet reflecting the full trust-layer uncertainty’—may have felt like bureaucratic hedging, but they match what we’ve been seeing in client flow. Order books lean towards protective structures rather than directional bets, which should tell us where sentiment is heading. Not bullish, not bearish—simply unsure and defensive.

As we move through June, keep an eye on how forward vol expectations trend relative to realised. We’ve found that during periods of constrained political mandates, especially in export-heavy economies, realised almost always catches up. Waiting too long often means paying more, and acting too soon can lead to unnecessary bleed. It’s a balancing act, one we’ve seen before in similar phases. Not dramatic, but decisive, and timing it well matters more than holding the boldest view.

For now, activity ratios remain stable across most exchanges, though rollover demand has edged lower in the last two sessions. That usually tells us that short-term conviction is thinning out. Again, not an opportunity to take unnecessary long gamma, but a prompt to shift sizing expectations lower through next week. There will be moments worth responding to—but fewer than expected, and not evenly spread.

Create your live VT Markets account and start trading now.