The yen is losing value as Japan approaches its election on February 8. The USD/JPY exchange rate is rising again towards 160.00 after recently falling to 152.00. Reports suggest that Prime Minister Takaichi’s ruling coalition may win a majority in the 465-seat lower house. This could allow the government more freedom in fiscal policy, leading to higher expectations for government spending.

The Yen is Under Pressure

As we approach the election on Sunday, February 8, the yen is facing pressure. The USD/JPY rate is climbing back towards 160.00 after dropping to 152.00. Many expect Prime Minister Takaichi’s coalition to win a majority, which could result in increased government spending and a weaker yen. In this situation, it might be wise to anticipate further weakness in the yen, with derivative markets providing defined-risk strategies. Buying USD/JPY call options with strike prices above 160.00 is a straightforward way to benefit from potential gains in the coming weeks. Implied volatility is high ahead of the election, indicating possible sharp movements once the results are known. This outlook is backed by the Bank of Japan’s ongoing supportive stance, keeping rates steady at their January meeting. Additionally, Japan’s core inflation for January was 1.9%, just below the central bank’s target. This makes it unlikely they will tighten policy or reduce the interest rate gap with the United States.

Risk and Strategic Considerations

We should remember the significant currency changes from a few years ago when USD/JPY jumped to multi-decade highs in 2024. During that time, the Ministry of Finance intervened to support the yen, and this risk could resurface if the yen’s decline accelerates after the election. Because of this, long option strategies might be more appealing than directly betting against the currency. An unexpected election result, like a hung parliament, could lead to a rapid strengthening of the yen. Traders should consider strategies for downside protection or volatility plays, such as a straddle, to capitalize on a large price movement in either direction. This approach safeguards against the possibility of being wrong about the consensus view. Following this weekend’s political event, the focus will soon shift back to key economic data. In the coming weeks, we will be attentive to any changes in statements from Bank of Japan officials. The next set of inflation figures will be crucial for insights into future policy decisions. Create your live VT Markets account and start trading now.

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