The USDJPY saw some recovery on Wednesday, US time. The key level to watch for today is 147.90. There is speculation regarding the possible resignation of Prime Minister Shigeru Ishiba, especially after his party lost its majority in the upper house elections in July. Analysts from MUFG believe that if Ishiba resigns, a new leader might prioritize increased spending.

Political Uncertainty and Yen Concerns

Political uncertainty is raising concerns about more selling of the yen. The chance of a new leader promoting larger fiscal spending is worrying the market. This instability could impact expectations for the Bank of Japan to adjust interest rates in October. Despite the recent political unrest, the JPY managed to recover a bit in trading. Given the ongoing political uncertainties in Japan, we should expect continued weakness in the yen. A leadership change might lead to increased government spending, which usually weakens a currency. This situation makes betting against the yen appealing in the coming weeks. We should think about buying call options on the USD/JPY pair that expire in late October or November. This way, we can profit from a rise in the currency pair linked to a weaker yen, while limiting our potential loss to the premium paid. Recent data from CME indicates that futures markets now see only a 15% chance of a Bank of Japan rate hike in October, down from over 40% just last month.

Interest Rate Implications and Market Strategy

The current turmoil is likely to postpone any plans the Bank of Japan had for raising interest rates. Japan’s latest core inflation reading for August 2025 came in at 1.9%, just under the central bank’s 2% target. This provides little reason for them to tighten policy amid political chaos. In contrast, the US Federal Reserve is expected to keep rates steady, creating a significant interest rate gap in favor of the dollar. Reflecting on the past, we recall that the Ministry of Finance intervened in the currency markets in late 2022 when the yen fell past the 150 mark against the dollar. Although we expect further weakening of the yen, we should be careful as we approach this historical level. Setting profit targets on long USD/JPY positions between 150 and 152 would be a smart way to manage the risk of potential government intervention. This political instability strengthens the view that yen-selling will continue to be a major theme. We anticipate the USD/JPY pair testing the 148 level soon, with a clear path toward 150 if Prime Minister Ishiba resigns. A political vacuum could hinder the Bank of Japan’s ability to act independently and raise rates. In addition to the dollar, we could also explore strategies involving other currencies. For example, buying call options on EUR/JPY or GBP/JPY might also be profitable. The European Central Bank and the Bank of England are unlikely to cut rates soon, suggesting that the yen may also weaken against the euro and the pound. Create your live VT Markets account and start trading now.

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