Insights 
VT 
Japan’s Prime Minister, Shigeru Ishiba, has pledged to ensure the swift implementation of a trade deal with the United States. He affirmed that concerns from businesses will be addressed and stated that there are no differences between Japan and the US regarding rice and defense equipment within the trade agreement.
There is, however, speculation about Ishiba’s political future. Despite maintaining a strong public stance, whispers suggest that there is growing support within Japan’s ruling LDP party to potentially remove him from his position. An internal party meeting is anticipated to take place next week.
Market Perception of Political Risk
We see the statements from the prime minister as a facade that masks significant political risk. The market is pricing in instability ahead of the ruling party’s internal meeting next week. His efforts to calm business concerns are unlikely to work when his own position is so fragile.
The key is to trade the uncertainty itself, not a specific direction. We believe the best response is to buy volatility on the Japanese currency. One-week implied volatility for USD/JPY has already climbed from around 7% to over 9.5% as traders brace for the political fallout.
This strategy profits from a large price move, whether the yen strengthens on a chaotic ouster or weakens. Looking at historical precedent, the surprise 2020 resignation of a previous prime minister saw the Nikkei 225 drop over 2% intraday. We expect similar or greater movement, making put options on the index an attractive hedge or speculative position.
Implications for Monetary Policy
The political turmoil also complicates the Bank of Japan’s path, especially with core inflation still hovering around 2.5%. A leadership vacuum makes any decisive monetary policy shift less likely, which may add to long-term pressure on the currency. Therefore, we are positioning for a sharp, unpredictable move in the coming days.
