USD/JPY: Election-driven shifts challenge bullish consensus – DBS

DBS Group Research’s Philip Wee analyses how Japan’s snap election and the so‑called Takaichi Trade could shift expectations for USD/JPY. He notes that the Liberal Democratic Party–Inshin landslide may support the Japanese Yen, while markets may be overstating Japanese Government Bond risks. Wee also highlights lingering downside risks for the Dollar and questions calls for a sustained USD/JPY surge.

Takaichi victory, Fed risks and Yen

"We do not rule out Japan’s snap election as a “buy the rumour, sell the fact” event for the weak JPY under the “Takaichi Trade”. The Liberal Democratic Party (LDP)-Inshin coalition’s landslide victory in Japan’s February 8 lower house election may bode well for the JPY."

"Currently, the USD’s downside risks remain present despite its initial bounce on President Donald Trump’s January 30 nomination of Kevin Warsh as the next Fed Chair in mid-May."

"As a result, markets remain unable to assess whether Warsh is still a hawk or support more rate cuts, his willingness and ability to defend the Fed’s independence against political pressure, and the extent of his alignment with Treasury Secretary Scott Bessent in reducing the Fed’s balance sheet."

"We believe that Trump is uneasy about USD/JPY rising materially above 160 because it visually reinforces USD strength, which runs counter to his reindustrialization agenda in the MAGA-driven trade deals, where countries are meant to increase their purchasing power to absorb US goods and invest in the US."

"We remain wary of market calls for USD/JPY to keep rising strongly after Takaichi’s victory."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)