USD/JPY consolidates above 150.00 on "Takaichi's trade"
- The Dollar consolidates above 150.00 after rallying 300 pips following Takaichi's victory.
- Takaichi is expected to revive Abenomics with a policy of high spending and easy monetary policy.
- In the US, the Government shutdown continues as the talks between Democrats and Republicans remain stalled.
The US Dollar stands at two-month lows right above 150.00 against the Japanese Yen on Monday, after having rallied about 300 pips from Friday’s closing levels, following the victory of the pro-stimulus candidate, Sanae Takaichi in the weekend’s LDP elections.
Takaichi is widely expected to replace Shigeru Ishiba as the country’s first female prime minister, and her previous positions against monetary tightening have boosted expectations of a return to a looser monetary policy and bigger spending plans.
These hopes are putting into question the Bank of Japan’s plans to tighten its monetary policy. Investors are dialling back expectations of a rate hike in October, which is triggering what markets have already named “Takaichi trade”, consisting of a weaker Yen and higher equity indexes.
Yen weakness is the major driver of the USD/JPY rally, as, in the US, the fundamental scenario remains broadly unfavourable. The US government shutdown has entered its second week with the negotiations between Democrats and Republicans stalled, and Trump has threatened massive layoffs in the public sector. This is likely to weigh on the US Dollar as soon as investors turn their focus back to the US.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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