USD/JPY might see some ups and downs as Japan prepares for a snap election on February 8. The results of this election could affect the yen, depending on how well the Liberal Democratic Party (LDP) performs and what policies they are expected to pursue afterward. If the LDP gains 34 seats in the election, it could lead to a weaker yen. This might mean a preference for easier fiscal and monetary policies. On the other hand, the alliance between Komeito and the Constitutional Democratic Party (CDP) could challenge the LDP’s power, potentially affecting the USD/JPY exchange rate.

Market Dynamics

Market conditions are also uncertain due to the possibility of foreign exchange (FX) interventions. A joint effort by the Federal Reserve and the Bank of Japan (BoJ) to sell USD/JPY could greatly impact the market. Due to these factors, USD/JPY is expected to remain volatile over the next month. Currently, one-month traded volatility is at 8.5%, which doesn’t seem too expensive. Right now, it’s hard to predict where USD/JPY will go. The snap election on February 8 creates a lot of uncertainty and could lead to significant movement in either direction, depending on how well the LDP does. If the LDP wins big and gains a simple majority by taking 34 seats, the yen might drop. This outcome would likely mean continued loose fiscal and monetary policies, which would push USD/JPY higher. We saw a similar situation during Abenomics in the mid-2010s, where expectations for aggressive easing consistently weakened the yen. However, we’ve been surprised by Japanese politics before. The opposition might be stronger than we think. The new alliance between Komeito and CDP could really challenge the LDP. If the LDP fails to gain a strong mandate, USD/JPY could end up going lower.

FX Intervention Risk

We should also consider the risk of foreign exchange intervention. While Japan has acted alone in the past—spending a record ¥9.2 trillion to support the yen in late 2022—the idea of a joint intervention with the U.S. Federal Reserve is now possible. If this happens, and USD/JPY is sold off, it could lead to a sharp decline in the exchange rate. Given the high level of uncertainty, making a specific bet is risky. Instead, it might be better to focus on the expected price fluctuations. With one-month traded volatility at 8.5%, options strategies that benefit from large movements, like buying straddles, could be a smart approach in the coming weeks. Create your live VT Markets account and start trading now.

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