Insights 
VT 
USD/JPY rose to approximately 151.90 in Wednesday’s early Asian session. The ascent comes after Sanae Takaichi became Japan’s first female prime minister.
Her victory followed an alliance between the ruling Liberal Democratic Party and the Japan Innovation Party. Takaichi’s support for fiscal stimulus complicates the Bank of Japan’s plans for rate hikes.
Impact On Yen
The expectation of Japan’s central bank delaying interest rate hikes could further affect the Yen. This scenario acts as an advantage for the USD/JPY pair in the near future.
Meanwhile, the US government shutdown has reached its fourth week after the Senate failed for the 11th time to pass funding to end the ordeal. This is now the third-longest shutdown in modern US history.
Uncertainty from the prolonged US shutdown and delayed economic data releases, like Nonfarm Payrolls, affects financial markets and the Federal Reserve’s decisions. Traders may speculate on an interest rate cut, weakening the US Dollar.
The Japanese Yen is heavily influenced by the Bank of Japan’s policy and US-Japan bond yield differentials. It is also considered a safe-haven currency, attracting traders during turbulent market periods.
Strategies And Implications
With USD/JPY pushing toward the 152.00 level, we see a clear tug-of-war between opposing forces. The election of a dovish Prime Minister in Japan suggests monetary policy will remain loose, weakening the yen. However, the risk of direct intervention from Japanese authorities to strengthen their currency is now extremely high at these levels.
We remember that when the pair last traded above 151 back in October 2022, the Bank of Japan spent a record ¥9.2 trillion to support the yen. Given this precedent, buying USD/JPY put options can serve as a cost-effective hedge against a sudden reversal. This strategy allows for participation in further upside while capping potential losses from a sharp, intervention-led drop.
On the other side of the trade, the prolonged US government shutdown introduces significant uncertainty for the dollar. This is causing implied volatility in one-month USD/JPY options to rise, recently ticking above 12% compared to the year-to-date average of around 8.5%. A long straddle strategy, which involves buying both a call and a put option, is therefore a practical way to trade this uncertainty and profit from a large price swing in either direction.
The interest rate differential between US and Japanese 10-year bonds, currently around 380 basis points, remains the fundamental driver. While Japan’s new leadership points to this gap remaining wide, a protracted US shutdown could hurt the American economy and force US yields lower. We are closely monitoring this spread, as a sustained narrowing would be the first signal of a potential top in the currency pair.
