The upcoming Japanese election could have notable impacts on the economy, bonds, and the Yen. Analysts from ING suggest that PM Sanae Takaichi is poised for a victory, potentially leading to increased Japanese Government Bond (JGB) yields and strengthening the USD/JPY. The balance between governmental spending and fiscal sustainability is a key factor in Japan’s economic future.
Takaichi might accelerate tax cut discussions if the Liberal Democratic Party (LDP) secures a majority in the lower house, claiming a public mandate. Structural economic changes are expected to cause JGB yields to rise, contributing to economic normalisation after years of deflation.
Impact On USDJPY
Further, a positive election for the LDP may bolster the ‘Takaichi trade,’ possibly pushing USD/JPY towards 160/162 levels. Throughout the first half of the year, the USD/JPY is predicted to oscillate between 155-160. However, anticipated Federal Reserve rate cuts could pull it closer to 150 by year-end. These projections reflect the intersecting influences of economic policy changes and international currency strength.
Looking back at the analysis from 2025, we can see that the core premise of a “Takaichi trade” did not materialize as Prime Minister Ishiba’s government took a more conventional path. The expected large-scale fiscal stimulus and rapid tax cuts under a Takaichi administration never occurred. This means the primary driver for a weaker yen that we were watching has been off the table for some time.
We have, however, seen 10-year JGB yields rise, but for different reasons. The move toward 1.18% has been driven by the Bank of Japan’s slow but steady monetary policy normalization, including the official end of Yield Curve Control in the fourth quarter of 2025. This structural shift by the central bank is now a far more important factor for the bond market than fiscal policy debates.
The USD/JPY pair did trade within the predicted 155-160 range for much of last year, but failed to break decisively higher. Currently, we are seeing the pair trade closer to 152.50, reflecting a market that is pricing in a more hawkish Bank of Japan. The momentum for significant yen weakness appears to have stalled without the catalyst of an aggressive fiscal push.
Monetary Policy Factors
On the U.S. side, the Federal Reserve only delivered a single 25 basis point rate cut in late 2025, less than the 50bp that was anticipated. Sticky US inflation, with the most recent January CPI data coming in at 2.9%, is making the Fed hesitant to signal further imminent cuts. This has kept the US dollar relatively supported and prevented the USD/JPY from falling towards 150.
Given this reality, traders should adjust their outlook for a more range-bound market in USD/JPY. With the major political catalyst having passed and both central banks now moving cautiously, the extreme volatility we witnessed in 2025 is unlikely to repeat. This suggests that selling short-dated option volatility could be a viable strategy, as the pair is more likely to consolidate than experience a major breakout.
