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Forex

JPY HAS NO SAVIOR

ADMIN || 20th October 2025

Yen is likely to weaken as LDP leader Sanae Takaichi moves closer toward becoming Japan’s first female prime minister. Given her reputation as a leader who favours looser fiscal and monetary settings, and the likelihood of BOJ caution in the face of a still-fraught political situation, USD/JPY will tend to mover further away from the sub-150 levels briefly touched late last week.

The yen’s weakening bias underscores the potential for Japanese equities to extend gains after they opened higher on Monday to build on the rebound for US peers at the end of last week.

Politically it is most likely that the LDP-Ishin coalition will be able to establish a majority government by inviting several independents. That would open the door for a PM Takaichi to run a functional and stable administration, unlike that of Ishiba. That is our latest default scenario a majority PM Takaichi government.

The Ishin opposition party may announce an accord as soon as today that would put Takaichi within 2 votes of the 233 she needs in Japan’s lower house to win the prime minister role. So far there are no signs that Ishin is seeking any major shift in fiscal settings, so yen traders will be focusing on the potential risks surrounding Takaichi’s history. The currency slid rapidly two weeks ago after she won the LDP vote, so there’s some potential for rapid declines again should a Prime Minister Takaichi lean toward aggressive moves on that front.

The more likely path for USD/JPY is for the pair to grind higher as risk sentiment recovers and Tokyo traders stick with bets the BOJ will leave rates on hold this month. A hike in December is still seen as a coin toss, while part of the reason for broader equities looking a touch calmer is the prospect of Fed rate cuts this month and in December. That’s a setup that argues for slow, steady yen declines rather than a fresh swoon.

We still believe that Abenomics made a sense when Japan was in deflation, and the Yen was 80. It does not when Japan has had 3% inflation for three consecutive years, and the Yen is at 150. For the same reason we have been bullish on JPY for many months & were proven wrong after the shock Takaichi win in the recent elections. But let’s see how quickly she understands that Abenomics does not fit in current Japanese macros, because that will matter for the longevity of her administration a lot considering the wide spread anger amongst local population against a cheap Yen.

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