Japan’s political shift is moving the Japanese yen. Prime Minister Sanae Takaichi won by a wide margin. This gives her party room to pursue bigger fiscal plans.
On 8 February, the Liberal Democratic Party (LDP) won 316 of 465 seats. This is the party’s highest total in the post-war era, going back to 1955.
Two Thirds Majority And Budget Control
With a two-thirds majority, the LDP can control key House of Representatives committees, including the Budget Committee. This reduces the need to negotiate with other parties to pass budget measures.
Takaichi has said she will suspend VAT on food for two years. Estimates put the cost at about JPY 5 trillion per year, or roughly 0.8% of Japan’s GDP.
Markets are concerned that larger deficits could weaken Japan’s public finances. One assessment puts net debt at just under 70% of GDP, based on Japan’s broader asset position.
With the LDP’s new two-thirds majority, these fiscal pledges now look highly likely. This removes political uncertainty and shifts market attention to the economic impact. The proposed JPY 5 trillion yearly VAT cut is a meaningful stimulus and will likely push the yen lower in the near term. This nervousness is already showing up in derivatives markets, with implied volatility in USD/JPY rising since the 8 February election.
Near Term Trading Implications For Yen
In the coming weeks, traders may want to position for a weaker yen. Fiscal expansion is likely to outweigh any potential tightening from the Bank of Japan. One defined-risk approach is to buy short-dated USD/JPY call options. This benefits from both a possible rise in USD/JPY and the currently higher volatility. This view is supported by late-2025 core inflation data, which showed inflation holding near 2.5%—a level this stimulus could push even higher.
A similar pattern played out in the early Abenomics period in the 2010s, when fiscal stimulus helped drive a sharp yen depreciation. The market is now pricing in a test—and possibly a break—of the 160 level in USD/JPY seen last year. A sustained move above 160 could trigger a faster decline in the yen.
However, the market’s fiscal fears may be overstated. While gross government debt is high (over 260% of GDP), net debt is far lower—below 70%—because Japan holds substantial government assets. This suggests recent yen weakness may be more of a short-term reaction than a long-term structural shift.
That creates room for contrarian or longer-horizon trades. If the initial drop in the yen fades without a true fiscal crisis, volatility may fall. In that case, selling out-of-the-money USD/JPY calls or JPY/USD puts could be a way to collect premium, based on the view that the currency will stabilize once markets digest the net-debt picture.
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