JPY continues to weaken in anticipation of snap election in Japan

JPY: Fiscal concerns intensify ahead of snap election hitting JPY and JGBs

The yen has been the worst performing G10 currency overnight resulting in USD/JPY rising above last year’s high of 158.87. It leaves the door open to a retest of the 160.00-level and then the high from back in July 2024 at 161.95. At the same time, the Nikkei 225 equity index has jumped higher by just over 3% overnight and hit a new record high. Renewed yen weakness reflecting building speculation that Prime Minister Takaichi is considering holding a snap Lower House election as soon as next month in an attempt to tighten her grip on power in Japan. According to Kyodo News, Prime Minister Takaichi has conveyed her intention to call a snap election to senior officials in the LDP party. She reportedly plans to announce a dissolution of the Lower House of parliament at the start of the next parliamentary session on 23^rd January. The Yomiuri newspaper reportedly earlier that the election may take place on 8^th or 15^th February citing unidentified government officials. A stronger performance for the LDP in the upcoming snap election under Prime Minister Takaichi’s leadership would further encourage market expectations that reflationist policies including looser fiscal policy could be reinforced and/or in remain in place for longer. There has been a heavy sell- off in the JGB market overnight to reflect these fiscal risks. The 30-year JGB yield has risen sharply by around 10bps lifting it up to 3.50%. In our latest FX Weekly report (click here) released yesterday we recommended a long EUR/JPY trade idea to take advantage of renewed yen selling momentum in the near-term.          

However, an even weaker yen will draw more concern from policymakers both in Japan and overseas. It was reported overnight that Finance Minister Satsuki Katayama had expressed her “concerns about the one-way weakening of the yen” at a meeting with US Treasury Secretary Scott Bessent. Katayama told reporters that “Treasury secretary Scott Bessent shares those concerns”. A Finance Ministry official who attended the meeting said that  the two nations will continue to communicate closely regarding currency developments at the deputy ministerial level. The discussions will further heighten speculation over Japan intervening in the FX market to support the yen if it continues to weaken. A development that may help to dampen yen selling as USD/JPY moves closer to the 160.00-level and highs from back in July 2024 when Japan last intervened. Scott Bessent has previously called on the BoJ to raise rates to support the yen. Bloomberg has reported comments from former BoJ board member Makoto Sakurai overnight who described Takaichi’s fiscal policy approach as “dangerous” and likely to keep the yen weak. He believes the weaker yen will put pressure on the BoJ to consider raising rates again as soon as in April rather than wait until June or July.

SNAP ELECTION SPECULATION BOOSTING TAKAICHI TRADES

Source: Bloomberg, Macrobond & MUFG GMR

USD: Muted market response following Trump’s latest attack on the Fed

The adverse market reaction to President Trump’s latest attack on the Fed’s independence was relatively mild yesterday, although that does not mean it is not important. The dollar index declined by around 0.6% at the worst point yesterday but has since recovered around half of those losses. There was a sell-off in the US Treasury market as well although major US equity indices finished modestly higher on the day helping to avoid a day of triple selling. The 10-year US Treasury yield rose only modestly by around 3bps. The relatively muted market reaction likely reflects market participants doubts over whether President Trump’s latest attack on the Fed’s independence will ultimately lead to looser monetary policy.  The 2-year US Treasury yield rose modestly yesterday indicating that market participants currently judge it more likely that the attacks will encourage the Fed to leave rates on hold in defiance of President Trump in order to send a message that they maintain control of setting rates. Any future decisions to cut rates alongside intensifying criticism from President Trump, would create more uncertainty over whether they are politically motivated. The release today of the latest US CPI report for December is expected to reveal stronger inflation after prices were distorted lower in the prior month which would further curtail expectations for Fed rate cuts at the start of this year.    

At the same time, President Trump has announced overnight that “any country doing business with the Islamic Republic of Iran will pay a tariff of 25% on any and all business being done with the US”. The levy is “effective immediately”. It comes in response to the government crackdown on protests in Iran. According to Bloomberg, China (26% of total exports & imports), the UAE (22.6%), Turkey (13.9%) and Iraq (9.9%) are the top trading partners. A development that creates some fresh unease over the sustainability of the trade truce currently in place between China and the US.   

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com