USDJPY: speculation over dissolution of the lower house drives sharp JPY weakness ✂️

Key takeaways

JPY weakens sharply on political risk
Markets price in looser policy mix
Intervention risk rises near key levels

Key takeaways

JPY weakens sharply on political risk
Markets price in looser policy mix
Intervention risk rises near key levels

The Japanese yen has come under strong pressure again following reports that Prime Minister Sanae Takaichi is preparing to dissolve the lower house of parliament as early as the start of the legislative session on January 23. This would pave the way for snap elections, potentially on February 8 or 15. USDJPY climbed to 158.9500, marking the yen’s weakest level since July 2024. The currency also hit record lows against the euro and Swiss franc, and its weakest level versus the British pound since 2008. Markets have interpreted this political move as strengthening Takaichi’s mandate and increasing the likelihood of further fiscal expansion, reinforcing expectations that Japan will maintain an accommodative policy mix.

JPY is by far the weakest G10 currency, source: xStation 5

The sell-off in the yen reflects the growing prominence of the so-called “Takaichi trade,” under which investors price in looser fiscal policy and continued pressure on the Bank of Japan to delay monetary policy normalization. Political consolidation ahead of budget negotiations raises the risk of higher debt issuance.

Japanese authorities attempted to limit the scale of the declines through verbal intervention. Finance Minister Satsuki Katayama confirmed that, in talks with US Treasury Secretary Scott Bessent, she expressed concerns about the “one-sided” depreciation of the yen.

USDJPY is trading near multi-month highs, up 0.60% on the day to around 159.0000 at the time of writing, and approaching the psychological 160.00 level.

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USDJPY: speculation over dissolution of the lower house drives sharp JPY weakness ✂️

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