Data indicates that wage growth in Japan has slowed again. Nominal wages are up 1.5% year-on-year, but inflation-adjusted wages have fallen more sharply than before. Despite rising nominal wages since the pandemic, inflation reduces purchasing power.

The Japanese Yen is weakening against the USD this morning, primarily influenced by Japan’s ruling LDP party’s election. Sanae Takaichi, elected as the party’s first female chairperson, is expected to become Japan’s first female prime minister on October 15.

Implications of Japan’s Political Shift

Takaichi will initially lead a minority government, requiring compromises with other parties. Public dissatisfaction stems largely from high inflation and reduced real wages. Expansionary fiscal policy risks further inflation, so caution is necessary.

Strengthening the yen could address excessive inflation and purchasing power loss by lowering import prices, especially for food and energy. The possibility exists for the Yen to appreciate in the coming weeks. Political developments and government formation will guide the future of Japan’s currency and economic policy.

This morning’s data reveals a continued squeeze on Japanese households, even as nominal wages grew 1.5% year-on-year. With the latest September CPI data showing headline inflation stubbornly at 2.8%, real wages have once again declined, eroding consumer purchasing power. This long-standing issue puts significant pressure on the incoming government.

The Japanese Yen has weakened in response, with the USD/JPY cross touching 158.50, but we see this as driven more by political uncertainty than the wage figures. The ruling LDP’s selection of Sanae Takaichi as its new leader introduces a major variable ahead of her expected confirmation as Prime Minister on October 15. The market is currently pricing in the risk of policy paralysis or missteps from her new minority government.

Potential Opportunities for Traders

Unlike the situation Shinzo Abe faced in 2012, the new administration cannot simply pursue expansionary fiscal policy without consequences. Such a move would likely worsen inflation, the very problem causing public dissatisfaction. Therefore, the old playbook of weakening the yen to boost the economy is politically unpalatable.

For derivative traders, this suggests the recent JPY weakness may be overdone and presents an opportunity. The most direct solution for the government to combat inflation would be to foster a stronger yen, which would lower the cost of imported energy and food. We see a tangible risk of a policy shift that could trigger a sharp JPY appreciation in the coming weeks.

Considering this, we believe traders should look at buying out-of-the-money puts on USD/JPY with November or December 2025 expiries. A surprise policy announcement or even strong rhetoric from the new cabinet could quickly push the pair back towards the 150-152 level. Strike prices around 155.00 or 152.50 offer a low-cost way to position for such a downward correction.

Traders should also monitor implied volatility, which has been creeping up ahead of the government transition. Any unexpected hawkish commentary from officials could cause volatility to spike, increasing the value of these long-option positions. The period immediately following the October 15 confirmation will be critical for setting the new policy tone.

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