Bank of America highlights that tightening election polls in Japan and new US tariffs are increasing fiscal and political risks, making the yen vulnerable. They suggest maintaining a long position on USD/JPY with a target of 152, and they recommend EUR/JPY and AUD/JPY to take advantage of potential yen weakness. Recent polls show that the LDP-Komeito coalition might have trouble keeping its Upper House majority in the election on July 20. This could increase fiscal and political uncertainty. Starting August 1, the US will impose a 25% tariff on Japanese goods, while the EU will not face such tariffs, putting more pressure on Japan’s economy.

Bank of Japan’s Possible Response

The Bank of Japan is expected to be more supportive of a weaker yen to address economic challenges from the higher tariffs. Currently, non-commercial traders are net long on yen at the CME, which could lead to a market squeeze. Bank of America advises staying long on USD/JPY, aiming for a rise to 152. They also suggest favoring EUR/JPY because Europe is exempt from tariffs, and support AUD/JPY due to China’s growth and Australia’s lack of direct tariff threats after the unexpected rate decision from the Reserve Bank of Australia. In simpler terms, Bank of America describes a situation of growing financial and political tension in Japan, which is undermining confidence in the yen. With an election nearing and early signs that ruling parties may lose seats, this could lead to uncertainties in government spending and policy. At the same time, new US tariffs on Japanese goods starting August 1 threaten Japan’s export-driven economy on two fronts—domestic politics and international trade.

Holding A Positive View On USD/JPY

In this context, the Bank of Japan may be willing to accept a weaker yen. This pattern has often occurred when growth looks slow, and it’s important to boost export performance. It would be typical for the BOJ to reduce interventions that prop up the yen if it benefits parts of the economy facing external challenges. Furthermore, data from the Chicago Mercantile Exchange shows that speculative positions are currently betting the yen will strengthen. If these traders are mistaken and the yen weakens instead, those positions could swiftly unwind, pushing the yen lower as the market reacts. Given these factors, the advice to maintain a positive outlook on USD/JPY is sound. A rise toward 152 seems reasonable given the current circumstances, which include different monetary policies between Japan and the US, and the increasing financial strain Tokyo may face soon. Betting that the yen will continue to weaken against the euro also makes sense, especially since Europe is not dealing with the same tariffs and fiscal pressures. The same rationale applies to the Australian dollar, which benefits from steady demand from China and the central bank’s surprising hawkish stance. Without direct trade barriers and a stable external position, Australia presents a favorable alternative to Japan. Therefore, there’s a strong preference for currency pairs with a vulnerable yen on one side and either a stable or improving currency on the other. In the coming weeks, traders should watch for changes in polling numbers and tariff negotiations—any shifts could lead to quick changes in FX positioning. Keeping an eye on central bank statements as well as real trade data and net positioning will help indicate any adjustments. The bigger the imbalance in speculative bets, the sharper the possible reversals. When positioning and policy diverge clearly, price movements tend to follow swiftly. Create your live VT Markets account and start trading now.

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