Japanese Prime Minister Ishiba resigned over the weekend. He had faced pressure after losing majorities in both the lower and upper houses of the Diet.
Following his resignation, the yen weakened and gapped lower in the early hours of Monday in Asia. As a result, yen crosses showed gains, reflecting a weak start for the yen in the wake of Ishiba’s departure.
Period Of Political Uncertainty Ahead
With Prime Minister Ishiba’s resignation, we see a period of political uncertainty ahead for Japan. This leadership vacuum makes it very difficult for the Bank of Japan to consider any policy changes. The market is now pricing in an extended period of inaction from the central bank.
This contrasts sharply with the policy in the United States, where the Federal Reserve is expected to keep its benchmark rate near 4.5% through the end of 2025 to manage inflation. This wide interest rate differential continues to make the yen an unattractive currency to hold. This policy divergence is the main driver for yen weakness.
We believe implied volatility in yen currency pairs will rise in the coming weeks as markets speculate on a successor. Derivative traders should consider buying options to profit from these expected price swings. The cost of options may be rising, but the potential for sharp moves is significant.
Looking back, we saw a different reaction when Prime Minister Abe resigned in August 2020, where the yen initially strengthened as a safe haven. Today, the global focus is squarely on interest rate differentials, which overrides any safe-haven appeal. The market dynamic has fundamentally changed over the past five years.
Positioning For Yen Weakness
Given this outlook, we are positioning for further yen weakness. A straightforward strategy is buying US dollar calls against the yen, targeting a move in the USD/JPY pair towards the 165 level. The latest Q2 2025 GDP figures, which showed a sluggish 0.2% growth rate, reinforce this bearish view on the Japanese economy.
For traders looking at other currencies, buying puts on the yen against the euro or British pound is also a viable strategy. Japan’s August 2025 inflation data showed core CPI at just 1.8%, well below targets and far from the levels seen in Europe. This supports the view that the BoJ will remain the last major central bank with a dovish policy.
