The Japanese yen (JPY) and Japanese Government Bonds (JGBs) are losing value, while the Nikkei index is rising. This trend is influenced by speculation about possible government support due to impending snap elections. Japanese Prime Minister Sanae Takaichi is expected to dissolve the lower house on January 23, leading to elections in February. Although an election isn’t due until 2028, Takaichi wants to take advantage of her high approval rating of almost 70%. However, there are worries about Japan’s fiscal health, as shown by the poor performance of the JPY and JGBs. Japan’s nominal GDP growth is about 4%, and 10-year bond yields are near 2%. The country can continue running budget deficits without increasing its debt ratio since its growth is outpacing borrowing costs.

Intervention Speculation

The Bank of Japan (BOJ) might step in if the JPY weakens further, especially with the USD/JPY nearing 160. Finance Minister Satsuki Katayama has voiced concerns about the yen’s decline, calling it excessive. Recently, the BOJ performed two currency interventions, buying ¥9.79 trillion and ¥5.53 trillion to slow the rise of the USD/JPY. These interventions followed rapid increases of 5.7% and 4.2%, respectively. The prospect of a February snap election is causing the Japanese yen and government bonds to weaken, as markets anticipate more government stimulus. This usually boosts the Nikkei but drags the yen down. The political uncertainty is putting downward pressure on the JPY, especially as the January 23 announcement approaches. This situation is creating significant volatility in the USD/JPY pair, which is great for options traders. The potential for yen weakness due to stimulus, combined with the risk of central bank intervention, suggests large price swings are likely in the coming weeks. Strategies that can profit from significant movements in either direction should be considered. As USD/JPY nears the 160 level, the possibility of BOJ intervention is very high. Looking back from early 2026, we remember the BOJ spending over ¥15 trillion in two major interventions when the rate passed this threshold. Current warnings from the Finance Minister indicate they are ready to act again, making 160 a tough resistance level.

Fiscal Health Concerns

Despite concerns about Japan’s fiscal health, we believe they may be overstated. Japan’s nominal GDP is growing well, with late 2025 data showing it around 4%, comfortably above the 10-year bond yield of about 2%. This positive growth-to-debt relationship allows Japan to manage more stimulus without sparking a fiscal crisis, which may limit long-term downside for the yen. The strong carry trade continues to push the USD/JPY pair higher. Traders are borrowing yen at nearly zero interest rates to invest in higher-yielding US dollars. This ongoing demand for dollars is intensified by election news. Given this backdrop, a tactical approach using derivatives makes sense. We suggest buying short-term USD/JPY call options to capture any upward momentum towards the 160 level. At the same time, traders should be prepared to buy puts or use put spreads to safeguard against or profit from a sudden reversal caused by BOJ intervention. Create your live VT Markets account and start trading now.

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