Bank of America reports that tightening election polls in Japan and upcoming US tariffs are raising fiscal and political risks, exposing the yen to vulnerability. They maintain a long position on USD/JPY with a target of 152 and prefer EUR/JPY and AUD/JPY to capitalise on potential yen weakness.
Early polls indicate the possibility of the LDP-Komeito coalition struggling to maintain its Upper House majority in the election on 20 July, leading to increased fiscal and political uncertainty. The US will impose a 25% tariff on Japanese goods from 1 August, while the EU will not face such tariffs, putting additional pressure on Japan’s economy.
Bank of Japan’s Possible Response
The Bank of Japan is likely to be more accommodating to a weaker yen to counteract economic challenges caused by higher tariffs. Currently, non-commercial traders are net long yen at the CME, creating potential for a market squeeze.
Bank of America recommends staying long on USD/JPY, aiming for a move towards 152. They also suggest favouring EUR/JPY due to Europe’s exemption from tariffs and supporting AUD/JPY, backed by China’s growth and Australia’s lack of direct tariff threats following the Reserve Bank of Australia’s surprising rate decision.
In plain terms, the current situation painted by Bank of America suggests increasing financial and political tension around Japan, which is dragging down confidence in the yen. With an election approaching and early signs that the ruling parties could lose seats, the outcome may lead to a more uncertain direction for government spending and policy. Simultaneously, with the US pressing ahead with steep import tariffs on Japanese goods from 1 August, Japan’s export-heavy economy appears likely to face pressure from two fronts—domestic politics and international trade.
Holding A Positive View On USD/JPY
The Bank of Japan, in this environment, may lean towards tolerating a weaker currency. That has often been the pattern when growth prospects look soft and export performance needs shoring up. It would not be out of character for the BOJ to step back from interventions that hold up the yen, especially when doing so could possibly support parts of the economy hit by external headwinds. To add to this, data from the Chicago Mercantile Exchange shows that speculative positions are currently tilted toward bets that the yen will strengthen. If these traders are wrong, and the yen weakens instead, those positions could unwind quickly, pushing the yen even lower as the market rushes to cover.
With that in mind, the call to hold a positive view on USD/JPY stands on firm footing. A move toward the 152 level looks justified under the present circumstances, considering both the mismatch in monetary policy between Japan and the US and the increasing financial strain Tokyo might be under in the near future. From a tactical standpoint, betting that the yen might continue to lose ground against the euro is also sensible, especially since Europe avoids these tariffs and is not currently facing the same type of fiscal overhang.
A similar case is made for the Australian dollar, which gains support from China’s steady industrial demand and the unexpected hawkish tilt from its central bank. With no direct trade barriers in play and a relatively stable external position, Australia becomes a favourable contrast to Japan. Therefore, preference leans toward cross-pairs involving a vulnerable yen on one side and either a low-risk or improving currency on the other.
Looking ahead over the next few weeks, traders may want to watch for any fluctuations in polling numbers and tariff negotiations—any shift could prompt rapid moves in FX positioning. It might be useful to keep track not just of central bank rhetoric but also of real trade data and net positioning for signs of adjustment. The greater the imbalance, particularly in speculative bets, the sharper the potential reversals. When positioning and policy start to diverge clearly, the price moves tend to follow—sometimes all at once.
