The Japanese Yen increased against major currencies following Sanae Takaichi’s victory in Japan’s general election, where the Liberal Democratic Party secured a supermajority. Initially pressured, the Yen strengthened after remarks by Japan’s Chief Cabinet Secretary, concerned about one-sided FX moves, and Atsushi Mimura’s intent to closely watch the forex market. At the time of reporting, USD/JPY was around 156.50, dropping 0.5%, while EUR/JPY declined 0.2% to 185.20.
Crude Oil prices fell, with West Texas Intermediate losing over 1% to $62.60. The US Dollar Index declined, fluctuating below 97.50, after ending last week positively. US stock futures showed mixed trading following a Wall Street rally. EUR/USD rose above 1.1850 amidst USD weakness, and GBP/USD remained stable around 1.3600. Gold gained nearly 4% last week and continued rising, exceeding $5,000.
Japanese Yens Economic Drivers
The Japanese Yen’s value hinges on Japan’s economic performance, Bank of Japan policies, bond yield differentials, and broader risk sentiment. The Yen, seen as a safe-haven, tends to gain during market instability. Changes in Japan’s monetary policy, especially post-2024, influenced the Yen’s strength relative to other currencies, as the BoJ moderated its ultra-loose policies.
With Sanae Takaichi’s decisive victory, we see a strengthened political will to combat excessive Yen weakness. The verbal interventions from top officials are not just noise; they are a clear signal that the 160 level for USD/JPY is a line they are now prepared to defend more aggressively. Considering that core inflation in Tokyo held above 2.5% for most of 2025, we believe the Bank of Japan now has the political cover to accelerate its policy normalization, making call options on the JPY an increasingly attractive hedge.
The long-standing carry trade, which has punished Yen bulls for years, is facing its most significant challenge yet. The US-Japan 10-year yield spread, which peaked above 400 basis points back in 2024, has since compressed to near 320 basis points as of last week. This narrowing differential reduces the cost of holding long JPY positions and suggests that puts on the USD/JPY pair could offer significant upside if this new political momentum continues.
Potential For Crude Oil and Gold
The positive developments in US-Iran nuclear talks introduce a clear bearish catalyst for crude oil. A potential deal would release more supply into a market that is already showing signs of being well-supplied, with recent data from the EIA in January 2026 pointing to a slight global surplus. We should therefore consider buying puts on WTI crude futures to position for a potential slide towards the low $50s.
Gold trading above $5,000 per ounce reflects the immense uncertainty we navigated through 2025. Looking back, we know that central banks added a record of over 1,050 tonnes to their reserves in 2025, a continuation of the trend we saw in prior years. However, with the US Dollar weakening and geopolitical tensions momentarily easing, this rally looks overextended, and selling out-of-the-money calls could be a prudent strategy to capitalize on potential consolidation.
