The Japanese Yen entered the new week under heavy pressure after the Liberal Democratic Party elected Takaichi as its new leader. Widely expected to replace outgoing Prime Minister Shigeru Ishiba on October 15, Takaichi is set to become Japan’s first female premier.
Her victory caught markets off guard, not because of her gender, but because of her long-standing advocacy for expansionary fiscal policy. Investors now doubt whether the Bank of Japan can maintain its cautious path toward policy normalization in the face of an administration committed to aggressive government spending.
The market’s immediate reaction was brutal. USD/JPY surged to 149.86 in Asian trade, it’s highest in five months, as the yen dropped over 1.6% in a single session. EUR/JPY also jumped toward record highs, underscoring the broad nature of yen weakness. In short, political change in Tokyo has rewritten near-term assumptions about monetary policy.
Takaichi’s policy tilt clashes with the BoJ’s tentative steps toward tightening. Previously, the central bank was expected to deliver a modest rate increase before year-end, supported by gradually improving inflation and resilient corporate sentiment. Now, those expectations are fading. Analysts argue that the new government will prioritize fiscal expansions, potentially raising bonds issuance and supply pressures, which complicates the BoJ’s path.
Economists at Meiji Yasuda Research warn that Takaichi represents a headwind to rate hikes, lowering the odds of a decisive policy shift this October. ANZ’s FX strategy team notes that even if data support a hawkish stance, the BoJ may opt to wait in order to avoid conflict with fiscal authorities. Meanwhile, strategists at VanEck stress that fiscal largesse could benefit equities but leaves the yen vulnerable, as higher debt supply undermines its safe-haven appeal.
Dollar strength has played its part, but risks are mounting. The U.S. government shutdown has delayed key data releases, including nonfarm payrolls, raising questions about Washington’s political stability. Futures markets are now pricing roughly 47 basis points of Fed easing before year-end, equivalent to less than two full cuts. This limits the dollar’s upside, even as yen weakness dominates headlines.
Mizuho strategists highlight that UDS/JPY can test 150.00 but warn that any further breakout faces headwinds from U.S. politics and Fed policy. If the BoJ chooses to hold back on hikes, the yen may slide further, but equally, an extended U.S. shutdown could revive demand for safe-haven flows, offering the yen some relief.
The technical outlook aligns with this policy-driven volatility, with well-defined zones now in play:
Near term, the yen remains under pressure as politics override data. If the BoJ stays dovish at its October meeting, USD/JPY could consolidate above 149 and attempt a break of 150.00. However, the combination of U.S. fiscal dysfunction and Fed easing expectations sets natural limits to the pair’s upside. Traders should watch closely for verbal interventions from Tokyo, as authorities may not tolerate an unchecked slide in the yen.
In essence, the pair is trapped between two narratives: Japan’s political shift toward fiscal expansion, and America’s own political and economic fragilities. The deciding factor may well be how firmly the BoJ signals its independence in the coming weeks.
Because it reduces the likelihood of BoJ tightening and raises debt supply, undermining investor confidence in Japan’s currency.
It represents a multi-month resistance zone and psychological threshold. Breaking it may invite official scrutiny or intervention.
Yes. If the government shutdown deepens global risk aversion, safe-haven flows could return to the yen, capping USD/JPY upside.
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This post was last modified on Oct 06, 2025, 09:08 BST 09:08