Yen Falls Below 147 — Traders Bet on Political and Fiscal Shift in Japan with 50% Election Risk

TradingKey - With a 50% chance that Japan’s ruling coalition may lose its majority in the July 20 Upper House elections, investors are increasingly betting on a weaker yen. Traders have started building long USD/JPY positions, anticipating a shift toward more expansionary fiscal policy.

On July 14, the USD/JPY exchange rate rose to 147.347, up about 2% from last week’s level above 144, and yen weakness has accelerated in July, with JPY down around 3% so far this month.

USD/JPY Exchange Rate, Source: TradingKey

According to CME Group, trading volume for USD/JPY call options surged more than 2x over put options on July 11, indicating growing investor interest in further yen depreciation.

Market Bets on Election Uncertainty

Nomura analysts noted rising demand for one-month bullish option structures, driven not only by uncertainty in U.S.-Japan trade negotiations but also by political risk ahead of the Upper House election.

Citi observed that some hedge funds have increased their long USD/JPY exposure, expecting yen weakness before the vote.

Nomura added that certain traders are targeting a return of USD/JPY to the 200-day moving average near 150.

Ruling Coalition at Risk — Yen Weakness Ahead?

With U.S.-Japan trade talks stalling, yen weakness is now primarily driven by domestic political uncertainty.

Prime Minister Shigeru Ishiba's ruling LDP-Komeito coalition must secure at least 50 out of 125 seats in the election to retain control of the Senate (out of 248 total seats).

This follows the ruling party’s loss of the House of Representatives majority in October 2024 — and another defeat would give opposition parties significant influence in shaping tax, monetary, and trade policy.

A recent NHK poll showed weakening support for Prime Minister Ishiba, with voters prioritizing sales tax cuts, preferences aligned more closely with opposition proposals than government plans.

Only 17% of respondents supported cash handouts, while 52% favored tax relief and abolition of cash handouts.

UBS SuMi Trust Wealth Management economists estimate a 50% chance of the ruling coalition losing control of the Upper House — which could spark renewed debate over lowering Japan’s consumption tax.

In addition, the opposition’s push for looser fiscal and monetary policies contradicts the BoJ’s tightening stance — already under criticism from right-wing lawmakers.

One conservative leader accused the BoJ of pursuing “premature tightening” amid weak economic conditions, calling for closer coordination between the Ministry of Finance and the central bank to boost domestic demand.

This political risk casts doubt on the Bank of Japan’s future rate hikes — adding to yen weakness as global investors reassess Japan’s macroeconomic stability.

Analysts at MUFG Morgan Stanley warned that prolonged political uncertainty could lead to higher market volatility and urged investors to prepare accordingly.