The Japanese yen has weakened as the new week starts, following Prime Minister Shigeru Ishiba’s resignation. The USD/JPY exchange rate is now about 148.22, up from around 147.35 on Friday. Other yen pairs have also risen, with EUR/JPY hitting about 173.45. Ishiba resigned after facing increasing pressure in his party due to a major electoral loss.

Political Unrest and Economic Impact

Ishiba took office in October 2024, but his coalition has lost majorities in both the lower and upper houses of parliament. Since Ishiba’s resignation has created significant political uncertainty, the yen is likely to weaken further. The immediate rise in USD/JPY to 148.25 appears to be just the start of a trend caused by unclear leadership. For traders, this suggests strategies that take advantage of a falling yen, like buying USD/JPY call options or selling yen futures. This political chaos complicates the Bank of Japan’s response to recent economic data, which shows core inflation for August 2025 still at a stubborn 2.8%. With the U.S. Federal Reserve’s funds rate steady at 4.75%, the big interest rate gap that supports the yen carry trade is now reinforced by indecision in Tokyo. We expect the BoJ to stay inactive during this leadership change, putting more downward pressure on the yen. The uncertainty around who will succeed Ishiba is likely to increase market volatility in the coming weeks. We are already seeing one-month implied volatility for USD/JPY options rise from below 9% last week to over 11%, as traders anticipate bigger price swings. This situation could make strategies like long straddles appealing, allowing for profit from significant moves in either direction once a new policy direction becomes clearer.

Historical Context and Future Outlook

Looking back, from 2022 to 2024, we saw the yen decline sharply due to a widening policy gap. The current political instability removes a crucial factor that had been supporting the currency. This suggests that the yen is more likely to weaken further, potentially approaching the multi-decade highs in USD/JPY seen in late 2024. Create your live VT Markets account and start trading now.

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