Insights 
VT 
The USD/JPY is experiencing a downward trend, hovering at 151.26, as noted by FX analysts Frances Cheung and Christopher Wong of OCBC. This decline is influenced by the unraveling of the Takaichi trade, complications in political alliances, rising US-China trade tensions, and a lower USD/CNY rate.
Political dynamics are anticipated to intensify before the 21 October parliamentary session to decide the Prime Minister. The LDP lacks a simple majority, holding 196 seats in the Lower House, fewer than the 233 needed for majority rule. This scenario suggests potential dilution of Takaichi’s policies or difficulties in policy approval, should she succeed.
BOJ Policy Rate
BOJ’s Tamura advocates positioning the policy rate nearer to neutral, avoiding rapid hikes, without shifting to restrictive levels. The macroeconomic conditions suggest a potential BOJ rate hike, possibly during the October MPC. Bullish momentum is waning, with RSI decreasing. Risks point downward with support levels at 150.35 and 149.67, and resistance at 151.90.
The unwind of the Takaichi trade has pushed USD/JPY lower, and we see risks firmly pointed to the downside in the near term. The political infighting ahead of the October 21st parliamentary vote for Prime Minister creates significant uncertainty. For derivative traders, this environment suggests preparing for increased price swings.
The Liberal Democratic Party’s struggle to form a majority, as highlighted by their 196 seats, is a core issue weighing on the pair. A recent *Nikkei* poll from October 15th shows public support for the LDP at a low of 28%, reflecting the instability. This political deadlock likely means any new leader’s policies will be watered down, removing a key pillar of yen weakness.
Implications For Traders
We are also seeing a more hawkish tone from the Bank of Japan, with board members openly discussing the need for rates to normalize. This talk is supported by last week’s Tokyo Core CPI data, which came in at 2.9%, stubbornly above the Bank’s 2% target for the 18th consecutive month. The possibility of a rate hike at the upcoming October meeting can no longer be dismissed, adding fuel to yen strength.
In response, one-week implied volatility for USD/JPY has surged to over 12%, a significant jump from the 8% we saw just two weeks ago. Traders should consider buying puts or establishing put spreads to position for a move towards the 150.35 support level. One-month risk reversals are also showing a growing bias for JPY calls, indicating that options traders are paying a higher premium for downside protection.
We remember the Ministry of Finance’s direct intervention back in late 2022 and 2024 when the yen weakened past similar levels. While the government is less likely to intervene to stop a strengthening yen, this history shows how sensitive the market is to sharp moves. The renewed trade friction between the US and China further enhances the yen’s appeal as a safe-haven currency.
