Japanese Officials’ Verbal Intervention Fails; Yen Breaches 159.0; Sanae Takaichi Policies Bring Uncertainty

TradingKey - Since January 2026, global investors' attention has once again shifted to the yen. The yen's exchange rate weakened further this week, with the USD/JPY rate breaking past 159.0. It has now weakened for five consecutive months, hitting its lowest level since July 2024. This aggressive depreciation trend has not only prompted Japanese Ministry of Finance officials to issue frequent signals of intervention but also reflects an exchange rate dilemma intertwined with Japanese political shifts, U.S.-Japan policy divergence, and global market sentiment. For the Japanese economy, which is highly dependent on imports, the continued softening of the yen is exacerbating imported inflationary pressures. For global investors, the policy maneuvering and market logic behind these fluctuations have become a key barometer for judging the direction of Asia-Pacific financial markets.

Following the breach of key levels for the yen, will verbal interventions by Japanese officials evolve into actual market action?

The recent depreciation trajectory of the yen has been clear and steep. On January 12, while Japanese markets were closed for a holiday, the offshore yen touched approximately 158.20 against the dollar, a new low since January 2025. On January 13, the exchange rate further broke through the 159.0 mark, approaching the historical low of 161.9.

The persistent weakness of the exchange rate has put Japanese officials on high alert, leading to a flurry of intervention signals. Finance Minister Satsuki Katayama stated clearly that views were exchanged with U.S. Treasury Secretary Bessent regarding the yen's recent "one-sided depreciation," with both sides expressing concern. This statement was interpreted by the market as a sign of U.S. acquiescence to potential currency market intervention by Japan.

Deputy Chief Cabinet Secretary Masanao Ozaki issued a direct warning, emphasizing that "the government will take appropriate measures against excessive currency fluctuations, including those driven by speculation."

Judging by the market reaction, the frequent official warnings have yet to effectively stem the yen's depreciation. Hiroyuki Machida, head of Japan FX and commodity sales at ANZ, analyzed that while Japanese officials believe the U.S.-Japan interest rate gap is narrowing and that yen weakness has deviated from fundamentals—thus justifying intervention—the sell-off trend is likely to persist until the election results and fiscal policy direction become clear. If the government wants to effectively support the yen, it will need to deploy larger-scale intervention forces.

Japanese political dynamics increase short-term downward pressure on the yen

The core driver behind this accelerated depreciation of the yen is the sudden shift in Japan's domestic political landscape. Media reports indicate that Prime Minister Sanae Takaichi has communicated her intention to LDP officials to dissolve the House of Representatives on January 23 and hold a snap election. Under the preliminary plan, the election could be announced on January 27 with voting on February 8, or announced on February 3 with voting on February 15. This news immediately ignited market uncertainty regarding Japan's policy direction, serving as the direct catalyst for the yen sell-off.

External analysts believe Sanae Takaichi's primary goal for a snap election is to consolidate her governing foundation. Although her cabinet has maintained high approval ratings since its formation in October 2025—with a December 2025 Yomiuri Shimbun poll showing a 73% approval rate—the ruling coalition lacks a majority in the House of Councillors, necessitating a House of Representatives election to strengthen the base of power.

The market generally fears that if the LDP wins the election, Takaichi will further push her expansionary fiscal policies. Such a policy direction would inevitably require the support of loose monetary policy, which would further widen the U.S.-Japan interest rate differential and exacerbate depreciation pressure on the yen.

Notably, a snap election could also delay the approval of the FY2026 budget beyond April, challenging the government's implementation of policies for inflation management and economic revitalization—a concern already voiced by several senior LDP officials. The risk-off sentiment triggered by this policy uncertainty has translated directly to the currency market, pushing the yen sharply lower against the dollar.

Divergence in U.S.-Japan policies accelerates yen weakness

If political shifts are the "catalyst" for this round of yen depreciation, the persistent divergence in U.S. and Japanese monetary policies remains the "fundamental" support. Although Japanese officials emphasize that the interest rate gap is narrowing, market expectations show that the difference in policy paths remains significant.

The latest U.S. employment data showed the unemployment rate falling to 4.4% in December 2025. The resilient labor market has significantly cooled market expectations for a near-term Fed rate cut, with the probability of a January cut now below 5%. The U.S. Dollar Index strengthened in response, touching a one-month high of 99.26, providing external momentum for the yen's depreciation.

Meanwhile, domestic policy uncertainty in the U.S. is indirectly affecting the yen's trajectory. On January 11, Fed Chair Powell announced that he had become the subject of a criminal investigation, involving allegations that government authorities used threats of criminal prosecution to force the Fed to cut rates.

Several former Fed chairs, former Treasury secretaries, and economists signed a joint statement criticizing the Trump administration's interference in monetary policy. On January 12, New York Fed President John Williams also spoke out, emphasizing that there is no reason for a rate cut in the near term and firmly defending the independence of monetary policy decisions.

Powell's resistance has lowered market expectations for Fed rate cuts; the magnitude of cuts in 2026 may be reduced, providing momentum for a stronger U.S. Dollar Index and further weighing on the yen/dollar exchange rate.

Market positioning data reveals divided sentiment among speculative capital toward the yen. The CFTC report from January 6 showed that non-commercial yen positions were net long by 8,815 contracts, with longs and shorts nearly balanced. This equilibrium indicates a clear divergence in market outlook: while technical indicators suggest the yen is in "oversold" territory, hinting at a potential short-term rebound, concerns over Japanese politics and fiscal policy are keeping bears from exiting their positions.

Policy maneuvering and key data present a dual challenge

Looking ahead, the yen's exchange rate will face the dual challenge of Japan's evolving political situation and U.S. inflation data in the short term. Domestically, the outcome of the snap election will be the core variable affecting the exchange rate.

If the Takaichi-led LDP wins the election, the implementation of expansionary fiscal policies will become clearer, potentially leading to sustained depreciation pressure on the yen. Conversely, if the election produces an unexpected result and policy uncertainty decreases, the yen may find an opportunity for a short-term rebound.

Additionally, currency intervention by the Japanese government warrants close attention. The market generally expects that if the yen approaches the 160 level, the Ministry of Finance may take substantive intervention measures; however, given market uncertainty regarding policy direction, the effectiveness of such intervention may be limited.

From the U.S. perspective, the upcoming December CPI data will be a key variable for the USD/JPY trend. The market widely expects that as statistical distortions caused by the government shutdown fade, the U.S. core CPI year-on-year growth for December will rise back to 2.7%. Persistent inflation would support the Fed in maintaining current interest rates in the near term, potentially further strengthening the dollar and pressuring the yen.

In the medium to long term, the yen's trajectory will still depend on Japan's economic fundamentals and the degree of policy divergence between the U.S. and Japan. Junya Tanase, head of Japan FX strategy at JPMorgan, believes the yen's fundamentals are quite weak and unlikely to change significantly in 2026, predicting USD/JPY could rise to 164 by the end of that year.

Parisha Saimbi, a strategist at BNP Paribas, also expects USD/JPY to reach 160 by the end of 2026. The core logic behind this pessimistic outlook is that Japan's structural economic issues are unlikely to be resolved in the short term, while the global macro environment generally favors risk appetite. Carry trades will continue to benefit, potentially further cementing the yen's role as a funding currency.

The current depreciation of the yen is essentially the result of the combined influence of Japanese political uncertainty, structural economic contradictions, and global macro-policy divergence. For global investors, yen volatility brings not only trading opportunities but also significant risks.