Behind the sharp decline of the Japanese Yen, how the victory of Takashi Takashi in the high market could trigger a rise in the US dollar

In mid-February, Japan’s general election just concluded. The Liberal Democratic Party led by Sanae Takaichi achieved an overwhelming victory as market expectations predicted, but this was followed by a continued weakening of the Japanese yen exchange rate. The USD/JPY climbed for consecutive days before and after the election, once approaching the 160 level, reflecting the market’s deep concerns about Japan’s economic policy outlook. This wave of yen depreciation has become a focal point in global financial markets.

According to a poll by Asahi Shimbun, the LDP’s strong victory laid the political foundation for Sanae Takaichi to implement her ambitious economic stimulus plans. However, market reactions to this policy mix have been pessimistic—investors are re-evaluating Japan’s fiscal sustainability.

Sanae Takaichi’s Fiscal Stimulus Plan is Driving Up Japanese Government Bond Yields

Earlier, Sanae Takaichi promised to suspend food tax collection for two years. This aggressive fiscal expansion has sparked serious concerns about Japan’s government debt. Carol Kong, a currency strategist at Commonwealth Bank of Australia, stated: “If the LDP performs strongly, it will give Takaichi more confidence to push forward with her budget stimulus, which will inevitably increase government debt burdens and put significant pressure on Japanese bonds and the yen.”

As policy uncertainty rises, Japan’s long-term government bond yields have surged, becoming a key driver of the yen’s sharp decline. Higher yields imply the market perceives rising borrowing costs for the Japanese government, shaking investor confidence in Japanese bonds’ outlook.

USD/JPY Rises Near 160, Hedge Funds Spot New Opportunities

As of early February, USD/JPY has risen for four consecutive days, reaching around 156.39. Data from custodial trust and settlement companies show that on February 3, trading volume of bullish options worth $100 million or more significantly exceeded that of similar put options, indicating institutional investors are actively long on USD against JPY.

Antony Foster, head of G10 spot trading at Nomura International, said: “Hedge funds are increasingly returning to arbitrage and Takaichi’s big-win trades. With the Japanese general election this weekend, the market feels USD/JPY could reach even higher levels, especially if Takaichi wins big.” This rebalancing reflects hedge funds’ firm view that the yen will continue to depreciate.

The Logic Behind Yen Depreciation: Policy and Market Expectations in Play

Matthew Ryan, chief market strategist at Ebury, pointed out that the election results are crucial. If Takaichi performs strongly, the yen could test the 160 level again or even break through this psychological barrier. From a macro perspective, the fundamental reason for the yen’s sharp decline is the interplay of policy uncertainty and rising market risk premiums—investors expect Japan’s fiscal expansion to further increase debt, ultimately leading to yen depreciation.

The surge in USD/JPY also reflects the widening interest rate differential between the US and Japan. With the Federal Reserve maintaining relatively high interest rates, if the Bank of Japan continues its easing policy, the interest rate gap will further expand, exerting ongoing pressure on the yen. The market is pricing in this long-term trend in advance, making yen depreciation an inevitable outcome.