Japan\u2019s political changes are being linked to movements in the Japanese yen. Prime Minister Sanae Takaichi won a landslide, giving her party the ability to move ahead with wider fiscal plans.<\/p>\n
On 8 February, the Liberal Democratic Party won 316 of 465 seats. This is the highest total in the post-war period since 1955.<\/p>\n
With a two-thirds majority, the LDP will control House of Representatives committees, including the Budget Committee. This lowers the need for deals with other parties when passing budget measures.<\/p>\n
Takaichi has said she will suspend VAT on food for two years. Estimates put the cost at about JPY 5 trillion per year, or around 0.8% of Japan\u2019s GDP.<\/p>\n
Markets are uneasy that bigger deficits could weaken Japan\u2019s public finances. One assessment points to net debt of just under 70% of GDP, based on Japan\u2019s wider asset position.<\/p>\n
Given the LDP’s new two-thirds majority, their fiscal promises are now a certainty, removing political risk and focusing the market on the economic impact. The proposed JPY 5 trillion annual VAT cut on food is a significant stimulus that will almost certainly put downward pressure on the Japanese Yen in the near term. We are seeing this market nervousness priced into derivatives, with implied volatility on USD\/JPY rising since the February 8th election.<\/p>\n
For the coming weeks, traders should consider positioning for a weaker yen, as the fiscal expansion will likely outweigh any potential monetary tightening from the Bank of Japan. Buying short-dated USD\/JPY call options provides a strategy with defined risk that capitalizes on both a potential rise in the exchange rate and the currently elevated volatility. This view is supported by core inflation data from late 2025, which showed inflation stubbornly holding around 2.5%, a level that this new stimulus will only exacerbate.<\/p>\n
Looking back, we saw a similar dynamic during the early days of Abenomics in the 2010s, where coordinated fiscal stimulus led to a major depreciation of the yen. The market is now pricing in a test, and potential break, of the 160 level for USD\/JPY that we saw last year. A sustained move above this level could trigger a sharper decline in the yen.<\/p>\n
However, we believe the market’s fears about Japan’s fiscal situation may be exaggerated. While gross government debt is high, at over 260% of GDP, the country’s net debt is a much more manageable figure below 70% thanks to substantial government assets. This suggests the yen’s weakness may be a short-term reaction rather than a long-term structural shift.<\/p>\n
This creates an opportunity for contrarian trades or for those with a longer horizon. If the initial burst of yen weakness subsides without a full-blown fiscal crisis, volatility will likely decrease. Selling out-of-the-money USD\/JPY calls or JPY\/USD puts could be a viable strategy to collect premium, betting that the currency will eventually stabilize once the market digests the manageable net debt reality.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Takaichi\u2019s landslide gives LDP budget control, enabling fiscal expansion; markets fear deficits may weaken yen, finances.<\/p>\n","protected":false},"author":62,"featured_media":17049,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-42126","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/42126","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=42126"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/42126\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/17049"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=42126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=42126"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=42126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}