Insights 
VT 
Last week, the USD/JPY was rising due to Sanae Takaichi’s victory in the LDP leadership election, suggesting she might become Japan’s next prime minister. However, the LDP’s coalition partner, Komeito, left the coalition, leading to a focus on which political bloc can secure enough votes for a new prime minister when parliament resumes, likely next Monday.
Opposition parties are attempting to unify around a candidate, although an opposition victory seems unlikely. The USD/JPY is expected to remain stable until Takaichi’s position is confirmed, which might take one to two weeks.
US-China Relations and Federal Reserve Updates
Meanwhile, the currency pair must also deal with US-China relations and potential updates from the Federal Reserve. There’s an outside possibility that USD/JPY could end the month near 147/148, but many conditions would need to align for this to happen.
We are seeing a familiar pattern of political uncertainty in Japan, reminiscent of the LDP leadership struggles we saw a few years back. The current instability within the ruling coalition is stalling USD/JPY’s momentum, much like when coalition partners hesitated after Sanae Takaichi’s initial victory in 2021. Traders should be cautious about expecting a quick breakout until the leadership question is resolved, which could take a couple of weeks.
This political friction is being reflected directly in the options market. One-month implied volatility for USD/JPY has jumped from around 9% to 11.5% in the last ten days, showing that the market is pricing in a significant move. This suggests that buying volatility through instruments like straddles could be a viable strategy to capitalize on the eventual resolution, regardless of the direction.
The situation is complicated by conflicting economic data, which creates a strong tug-of-war on the currency pair. Last week’s Japanese core CPI came in at a stubborn 2.8%, putting pressure on the Bank of Japan, while the latest US jobs report showed unexpected strength, reinforcing the Federal Reserve’s hawkish stance. This fundamental clash is keeping the pair coiled tightly, building potential energy for a sharp move.
Strategies for Trading Volatility
We recall how USD/JPY struggled for direction back then until the political path was clear. A similar scenario now suggests that traders should consider option structures that benefit from a spike in volatility, rather than placing simple directional bets. An eventual confirmation of a hawkish new leader could see a quick test of the 160 level, while a surprise opposition coalition could trigger a sharp drop toward 154.
Beyond domestic politics, we must also watch for external factors like the upcoming US-China trade dialogue and any forward guidance from the Fed’s next meeting. History shows us these external pressures can easily overshadow local Japanese events. Therefore, any long volatility positions should be structured with an eye on key dates for international news flow.
