The Liberal Democratic Party's landslide victory faces many uncertainties. Will the Japanese Yen continue to appreciate? The market is focusing on two key factors.

Japan’s election results have just been announced. The ruling coalition formed by the Liberal Democratic Party and Nippon Ishin no Kai secured 352 seats out of 465, achieving a decisive victory. This political upheaval is profoundly affecting the yen exchange rate and has driven the Japanese stock market to record highs. But the key question is: will the yen continue to appreciate? Currently, the market is cautious, as many variables remain unclear.

Election Results Drive “High City Trading” Deepening, Yen Volatility Intensifies

The victory in the February 9 election means that Prime Minister Fumio Kishida’s policy push will be smoother moving forward. As a result, “Koshi trading” (Japanese stocks rising + Japanese bond yields increasing + yen depreciating) has further strengthened. The Nikkei 225 index rose over 5%, breaking through 57,000 points and hitting a record high.

However, the yen’s performance has been surprising. After the election results were announced, the USD/JPY exchange rate first depreciated, then appreciated. This market reaction signals an important message: investors are beginning to worry that the government may intervene in the currency market.

Bloomberg strategist Mark Cranfield pointed out that macro traders are closely monitoring government intervention signals. He believes that political and central bank officials in Japan may take coordinated verbal support actions, which are not yet fully priced into the forex market. In other words, the scope for shorting the yen may be narrowing.

Forex Market Cautions on Government Intervention, 160 Yen as Key Threshold for Yen Appreciation

MUFG and Morgan Stanley forex strategists highlighted a critical level to watch. If the USD/JPY exchange rate approaches 160 yen per dollar, market vigilance for potential forex intervention will sharply increase, making further yen depreciation difficult. This suggests that a line of defense against yen appreciation is forming.

Currently, market focus is on two directions. First, whether Prime Minister Fumio Kishida will quickly push for a consumption tax cut. If policies clearly signal a reduction in consumption tax, the pressure for yen depreciation will increase. Conversely, if a more cautious stance is adopted, the pressure for yen depreciation will ease, which could actually favor yen appreciation.

Consumption Tax Decisions and Central Bank Rate Hikes as Dual Variables, Determining Yen Trends

The second key variable comes from Japan’s monetary policy. Overnight index swap data shows that the market currently expects about a 75% chance that the Bank of Japan will raise interest rates by 25 basis points at the April meeting. This expectation has a significant impact on the yen.

If expectations for Japanese rate hikes increase or the Fed’s rate cut expectations rise, the USD/JPY could face downward pressure, potentially strengthening the yen. Conversely, if Japanese rate hike expectations weaken or the Fed maintains high interest rates, USD/JPY could rise, and yen appreciation may be thwarted.

A decisive moment is approaching. The Bank of Japan and the Federal Reserve will announce their latest rate decisions on March 19. These decisions will provide concrete answers about whether the yen will continue to rise. Investors need to closely monitor any signals from policy stances, as these will directly influence the future movement of the yen.