Japanese Prime Minister Ishiba resigned over the weekend after losing majorities in both the lower and upper houses of the Diet. After his resignation, the yen weakened significantly, dropping lower early Monday in Asia. Consequently, yen crosses gained, reflecting a shaky start for the yen following Ishiba’s exit.

Political Uncertainty Ahead

Ishiba’s resignation leads to a period of political uncertainty for Japan. This leadership gap complicates the Bank of Japan’s ability to make policy changes. Markets are now expecting a long stretch of inaction from the central bank. This situation is very different from the United States, where the Federal Reserve plans to keep its benchmark rate around 4.5% until the end of 2025 to control inflation. This large difference in interest rates makes the yen less attractive to hold, driving its weakness. We anticipate that implied volatility in yen currency pairs will increase in the coming weeks as markets speculate about Ishiba’s successor. Derivative traders might want to buy options to profit from these expected price swings. Although the cost of options may be rising, the potential for sharp price movements is significant. Looking back to when Prime Minister Abe resigned in August 2020, the yen initially strengthened as a safe haven. However, today, the major concern is interest rate differences, overshadowing any safe-haven appeal. The market dynamics have fundamentally shifted over the past five years.

Positioning for Yen Weakness

Given this outlook, we are preparing for more yen weakness. One simple strategy is to buy US dollar calls against the yen, aiming for a move in the USD/JPY pair towards 165. The latest GDP figures for Q2 2025, showing only a 0.2% growth rate, support our bearish outlook on the Japanese economy. For traders considering other currencies, buying puts on the yen against the euro or British pound is also a good option. Japan’s August 2025 inflation data showed core CPI at just 1.8%, well below targets and far from Europe’s levels. This reinforces the belief that the Bank of Japan will remain the last major central bank with a dovish policy. Create your live VT Markets account and start trading now.

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