Analysts from MUFG Bank have pointed to Japan’s upcoming election on 8 February as a factor adding pressure on the Japanese Yen. Following a temporary drop to 152, the USD/JPY exchange rate is moving back towards 160. This shift is linked to political developments in Japan.
Reports suggest that Prime Minister Takaichi’s ruling coalition is likely to achieve a majority in the lower house. This political stability may raise concerns about increased government spending, affecting fiscal discipline. The expected outcome could maintain upward pressure on the USD/JPY rate and influence long-end Japanese Government Bond (JGB) yields.
Market Dynamics And Political Changes
The FXStreet Insights Team provides market observations from experts, supplemented by insights from various analysts. The content reflects the market’s dynamics as analysed by professionals, capturing the potential impacts of political changes on currency and bond markets.
Around this time last year, we were watching the political situation in Japan closely as the February 2025 election pushed USD/JPY back toward 160. The market correctly anticipated that Prime Minister Takaichi’s victory would lead to expanded fiscal policy. This established a clear playbook where domestic political shifts toward more government spending directly translate to yen weakness.
The aftermath confirmed our concerns over fiscal discipline when a larger-than-expected ¥25 trillion stimulus package was passed in April 2025. Following that, we saw USD/JPY break its previous highs, eventually touching 163.50 in the summer of 2025. The 10-year Japanese Government Bond yield also climbed steadily from around 1.0% to over 1.3% in the same period, reflecting the increased bond issuance.
Strategies For Upcoming Market Moves
Heading into the coming weeks, traders should be using last year’s events as a guide. With current whispers of a new supplementary budget to support a slowing economy, positioning for a repeat of yen weakness appears prudent. Long USD/JPY call options with a strike price around 162 or 163 could offer significant upside if history repeats itself.
We can also look at historical volatility from early 2025, which saw a sharp increase in the run-up to the budget announcement. Currently, USD/JPY 3-month implied volatility is sitting near 9%, below the 12-13% levels seen during that period of uncertainty. This suggests that options may be relatively cheap, making strategies like buying straddles attractive for those anticipating another round of sharp, policy-driven currency moves.
