The upcoming Japanese election might significantly affect the economy, bonds, and the Yen. Analysts from ING believe that Prime Minister Sanae Takaichi is likely to win. If this happens, we could see higher Japanese Government Bond (JGB) yields and a stronger USD/JPY. The balance of government spending and financial health is crucial for Japan’s economic outlook.
If the Liberal Democratic Party (LDP) gains a majority in the lower house, Takaichi could speed up talks about tax cuts, claiming a public mandate. Structural changes in the economy are expected to drive JGB yields up, helping Japan return to normalcy after years of deflation.
Additionally, a successful election for the LDP might support the so-called ‘Takaichi trade,’ which could push USD/JPY towards the 160 to 162 range. Throughout the first half of the year, USD/JPY is expected to fluctuate between 155 and 160. However, expected rate cuts from the Federal Reserve might pull it closer to 150 by the end of the year. These predictions highlight the connection between economic policies and currency movements.
Reflecting back to 2025, it’s clear that the idea of a “Takaichi trade” didn’t happen. Instead, Prime Minister Ishiba’s government followed a more traditional approach. The large fiscal stimulus and rapid tax cuts that were anticipated under a Takaichi government did not occur. Thus, the driving force for a weaker yen we’ve been monitoring has been absent for a while.
We’ve seen the 10-year JGB yields increase, but for different reasons. The rise to 1.18% is due to the Bank of Japan’s gradual normalization of monetary policy, including the end of Yield Curve Control in the fourth quarter of 2025. This shift by the central bank is now more significant for the bond market than debates about fiscal policy.
The USD/JPY exchange rate traded within the expected 155-160 range for much of last year but did not break decisively higher. Currently, it trades closer to 152.50 due to a more hawkish stance from the Bank of Japan. The momentum for a weaker yen seems to have stalled without a push from aggressive fiscal measures.
On the U.S. side, the Federal Reserve only made one 25 basis point rate cut in late 2025, which was less than the anticipated 50 basis points. Persistent U.S. inflation, with January’s CPI at 2.9%, is making the Fed cautious about further cuts. This has kept the U.S. dollar stable, preventing USD/JPY from dropping towards 150.
Given this situation, traders should expect a more stable USD/JPY market. With the major political changes behind us and both central banks proceeding carefully, the extreme volatility we saw in 2025 is unlikely to happen again. This implies that selling short-dated option volatility may be a sensible strategy, as the pair is more likely to stabilize rather than experience a major breakout.
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