The USDJPY saw some recovery on Wednesday, US time. A level of 147.90 is considered pivotal for today’s session.
Speculation surrounds the potential resignation of Prime Minister Shigeru Ishiba after his party lost its majority in the upper house elections in July. Analysts from MUFG suggest that if Ishiba steps down, a new leader might increase spending.
Political Uncertainty and Yen Concerns
Political uncertainty is causing concerns about accelerated yen selling. The possibility of a new leader favouring larger fiscal spending worries the market.
This instability might affect expectations for the Bank of Japan to adjust interest rates in October. Despite recent political turmoil, the JPY managed to recover some ground in trading.
The ongoing political uncertainty in Japan suggests we should anticipate continued weakness in the yen. A potential leadership change could usher in a new wave of government spending, which typically devalues a currency. This environment makes betting against the yen an attractive strategy for the coming weeks.
We should consider buying call options on the USD/JPY pair with expiration dates in late October or November. This allows us to profit from a rise in the currency pair, which corresponds to a weaker yen, while capping our potential loss at the premium paid. Recent data from the CME shows futures markets are now pricing in only a 15% chance of a Bank of Japan rate hike in October, down significantly from over 40% just last month.
Interest Rate Implications and Market Strategy
The turmoil is likely to delay any plans the Bank of Japan had to raise interest rates. Japan’s latest core inflation reading for August 2025 came in at 1.9%, remaining just below the central bank’s 2% target and giving them little reason to tighten policy amidst political chaos. This contrasts sharply with the US, where the Federal Reserve is expected to hold rates steady, maintaining a wide interest rate differential that favors the dollar.
Looking back, we remember the Ministry of Finance intervened in the currency markets in late 2022 when the yen weakened past the 150 level against the dollar. While we expect the yen to weaken further, we should be cautious as we approach that historical threshold. Setting profit targets on long USD/JPY positions around the 150 to 152 range would be a prudent way to manage the risk of potential government intervention.
This political instability reinforces the view that yen-selling will continue to be a dominant theme. We see the USD/JPY pair testing the 148 level soon, with a clear path toward 150 if Prime Minister Ishiba resigns. The political vacuum would make it very difficult for the Bank of Japan to act independently and hike rates.
Beyond the dollar, we could also explore strategies against other currencies. For instance, buying call options on EUR/JPY or GBP/JPY could also be profitable. The European Central Bank and the Bank of England are not expected to cut rates soon, meaning the yen is likely to weaken against the euro and the pound as well.
