USD/JPY surges to nine-month highs near 153.00 on Takaichi Trade
- The Dollar has rallied more than 500 pips this week the reaching levels near 153.00.
- Market expectations that the new LDP leader might boost fiscal spending are bleeding the Yen.
- The US Dollar rallies across the board on a Japaneserisk-off markets with the FOMC Minutes on focus.
The US Dollar is going through a spectacular rally against a weak Japanese Yen this week. The pair has appreciated more than 500 pips since last week’s closing, to reach its highest levels since late January, a few pips below 153.00.
A mix of Yen weakness following the unexpected victory of the fiscal-dove Sanae Takaichi in Japan’s Liberal Democratic Party’s elections and US Dollar strength in risk-averse markets has created the perfect storm for the Japanese Yen.
Takaichi's victory puts BoJ's tightening plans into question
The new LDP leader, and highly likely next prime minister, has not given any clear hint of her policies. However, her profile as a former assistant to PM Shinzo Abe has fueled speculation that she might revive Abenomics’ playbook, increasing fiscal spending and hindering the BoJ’s monetary tightening plans.
Etsuro Honda, one of Takaichi’s closer advisors, observed on Monday that October might be too early for an interest rate hike, but he sounded open to a quarter-point raise in December, if the macroeconomic environment allows for it.
The US Dollar, on the other hand, is strengthening across the board. The combination of a political crisis in France, which is hammering the Euro, fiscal concerns in Japan, and the lack of progress in the US shutdown has crushed risk appetite, boosting demand for traditional safe havens, including the US Dollar.
The focus today is on the release of the minutes of the last Fed meeting, but they are unlikely to have a significant impact on the US Dollar. A rate cut in late October is practically a done deal for the market, and Fed officials remain divided about the path forward.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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