DBS Group Research’s Philip Wee analyses potential changes in expectations for USD/JPY following Japan’s snap election and the “Takaichi Trade”. The Liberal Democratic Party–Inshin landslide may benefit the Japanese Yen, with markets potentially overstating risks related to Japanese Government Bonds.
Potential Dollar Downside
Lingering downside risks for the Dollar are noted, raising doubts about a sustained surge in USD/JPY. The nomination of Kevin Warsh as the next Fed Chair introduces uncertainty regarding his stance on interest rates and his ability to uphold Fed independence.
Uncertainty persists over Warsh’s alignment with Treasury Secretary Scott Bessent in terms of reducing the Fed’s balance sheet. Additionally, Trump is reportedly concerned about USD/JPY rising above 160, as it suggests USD strength against his trade agenda.
Market predictions for a strong USD/JPY rise following Takaichi’s victory remain under scrutiny. The FXStreet Insights Team compiles observations and insights from renowned experts, including additional internal and external analysis.
We recall the skepticism surrounding the “Takaichi Trade” following the February 2025 snap election. That view proved correct as the yen strengthened after the initial sell-off, and the anticipated surge in USD/JPY above 160 never occurred. This history of a “sell the fact” reaction informs our cautious stance on any calls for dollar strength now.
US Dollar Risks
The downside risks for the US dollar, which we highlighted last year during the uncertainty of Kevin Warsh’s Fed nomination, have now become more concrete. With the latest US CPI data for January 2026 showing inflation cooling to 2.8%, markets are now pricing in a 60% chance of a Fed rate cut by the third quarter. This contrasts sharply with the hawkish sentiment of early 2025 and removes a key pillar of support for the dollar.
Meanwhile, the case for a stronger yen is building, a major shift from the situation a year ago. Preliminary reports from the ongoing “Shunto” spring wage negotiations in Japan indicate major corporations have agreed to average pay hikes of over 4.2%, the highest in decades. This sustained wage pressure makes it highly likely that the Bank of Japan will abandon its negative interest rate policy within the next two meetings.
For derivative traders, this environment suggests positioning for yen appreciation. One-month implied volatility in USD/JPY has risen from 9% to 13% over the past few weeks, signaling that the market is preparing for a significant move. We believe buying JPY call options or establishing bear put spreads on USD/JPY are prudent strategies to capitalize on the growing policy divergence between a dovish Fed and a hawkish Bank of Japan.
