Key points

The U.S. midterm elections will take place on November 3, 2026. All 435 seats in the House of Representatives and some seats in the Senate will be contested, with the majority battle in Congress affecting fiscal policy and government bond issuance plans. These factors will influence the trends in U.S. long-term interest rates and the USD/JPY exchange rate, drawing attention from financial markets. Experts predict that a significant decline in U.S. stocks is unlikely regardless of the election outcome, and that the resolution of political uncertainty will support stock prices. In particular, the USD/JPY exchange rate is expected to continue a dollar-strengthening trend due to the U.S. advantage in real interest rate differentials between Japan and the U.S. [1] [2] [3] [4]

Overview and Importance of the 2026 U.S. Midterm Elections

The U.S. midterm elections will be held on November 3, 2026, with all 435 seats in the House of Representatives and some seats in the Senate up for election. Currently, the Republican Party holds the majority in both chambers, but the election results could change the balance of power in Congress, potentially affecting the Trump administration's policy management. Changes in congressional composition will impact fiscal policy and government bond issuance plans, playing an important role in the trends of U.S. long-term interest rates and the USD/JPY exchange rate. The elections are not merely a collection of local elections but a significant political event that will influence the federal government's policy execution ability over the next two years. [1] [2]

Midterm elections occur at the midpoint of the president's four-year term, with all House seats and some Senate seats contested. If a divided government emerges, large-scale policy changes become difficult, but administrative measures under presidential authority will continue, so policy is not completely halted. Financial markets focus not only on the election results but also on the feasibility of subsequent policy implementation. In 2026, the U.S. fiscal deficit is expected to reach about $2 trillion, and changes in government bond issuance will affect long-term interest rates and the USD/JPY exchange rate, making the direction of fiscal policy after the election particularly important. [2]

Outlook on the Impact of the Midterm Elections on Stock Prices

Ryoji Musha analyzes that regardless of whether the Republican Party maintains its majority in both chambers or the Democratic Party gains seats, a significant decline in U.S. stocks is unlikely. The conclusion of the uncertain event of the election itself is considered a positive factor for the stock market. Historically, political uncertainty has decreased after midterm elections, leading to increased capital inflows into the stock market. Once election results are finalized, the direction of policy management becomes clearer, easing investors' risk-averse attitudes. [1]

However, if the Democratic Party gains a majority in Congress, policy management stagnation or confusion may occur, but the fundamental direction of the U.S. economy is not expected to change significantly. If the Republican Party maintains the majority, existing policies are more likely to continue. In either case, trends in interest rates and corporate performance will have a significant impact on stock prices. The impact on Japanese stocks is considered limited, with expectations for the Takashi administration's economic policies and capital inflows from overseas investors serving as supportive factors. The greatest risk after the election is a sharp rise in U.S. interest rates. [1]

Trends and Influencing Factors of the USD/JPY Exchange Rate

The USD/JPY exchange rate is influenced by changes in fiscal policy and government bond issuance plans through the majority battle in Congress, which affect U.S. long-term interest rates and, via the interest rate differential between Japan and the U.S., price formation. Depending on the election results, a ruling party victory is expected to lead to dollar appreciation and yen depreciation; a divided Congress to dollar depreciation and yen appreciation; and a complete opposition victory to medium- to long-term dollar depreciation and yen appreciation. However, past midterm elections have shown that a divided Congress does not necessarily lead to dollar depreciation and yen appreciation, as the Federal Reserve's monetary policy cycle ultimately influences outcomes. The real interest rate differential between Japan and the U.S. remains in favor of the U.S., maintaining the dollar-strengthening structure. [3] [4]

In 2026, the USD/JPY exchange rate may face downward pressure or further dollar appreciation depending on the election results, with changes in fiscal, trade policies, and interest rate outlooks after the election being important. If U.S. long-term interest rates rise, dollar appreciation and yen depreciation are more likely, and awareness of expanding fiscal deficits tends to raise government bond yields. Conversely, a divided Congress may increase fiscal discipline awareness, potentially lowering U.S. interest rates and applying pressure for dollar depreciation and yen appreciation. The situation in Iran and monetary policies in Japan and the U.S. also serve as critical points for the USD/JPY exchange rate. [4]

Uncertainties in Monetary Policy and International Affairs

The Federal Open Market Committee (FOMC) meetings on October 27–28, 2026, the midterm elections on November 3, and U.S. Treasury bond auction announcements on November 2 and 4 occur consecutively, influencing the market. In particular, the FOMC's policy interest rate decisions significantly affect the USD/JPY exchange rate trends before and after the election. It is important to assess the impact of these monetary policy events in addition to the election results. The government bond supply policy immediately after the election also affects long-term interest rates. Additionally, the situation in Iran remains a major uncertainty, with the possibility that the U.S. may resume military actions against Iran after the election. Fluctuations in crude oil prices and geopolitical risks influence dollar appreciation and yen depreciation, contributing to financial market instability. The monetary policy trends in Japan and the U.S. are also key factors to watch regarding the USD/JPY exchange rate. [2] [4]

The real interest rate differential between Japan and the U.S. continues to favor the U.S., and the dollar-strengthening trend remains unchanged. Japan's interest rate increases are mainly due to rising inflation expectations, with limited increases in real interest rates. U.S. real interest rates have reached levels not seen since 2008, supporting the dollar's strength. Despite the Bank of Japan's rate hikes and government interventions, the yen's depreciation trend continues, largely influenced by this real interest rate differential structure. Going forward, monetary policy trends in both countries are expected to continue determining the direction of the USD/JPY exchange rate. [4]