The Japanese Yen dropped by 0.5% against the US Dollar, making it the weakest currency in the G10 group. This drop is linked to speculation about Prime Minister Takaichi’s plans for an early election, which is causing the USD/JPY exchange rate to approach levels not seen since early 2025. The market is focused on how Takaichi’s potential election call could affect the economy. With her high approval ratings, she aims to strengthen her political influence. This situation positions her as a supporter of loose fiscal and monetary policies, causing Japanese bond yields to rise.

Potential for Verbal Interventions

There are rising concerns about the Yen’s ongoing decline, suggesting that the finance ministry might consider verbal interventions. Japan’s Finance Minister Katayama has been in talks with Treasury Secretary Bessent regarding these currency changes. Analysts are now paying close attention to the USD/JPY psychological barrier at 160, noting the July 2024 peak just below 162. The political uncertainty in Japan suggests the Yen might continue to weaken against the Dollar. Takaichi’s dovish approach indicates a likely movement of USD/JPY towards 160. This trend signals a strong opportunity for JPY selling in the coming weeks. Recent data supports this viewpoint. Japan’s national CPI for December 2025 was lower than expected at 1.8%, which reduces the urgency for the Bank of Japan to tighten its policies. The large interest rate gap with the US Federal Reserve, which recently kept rates steady, continues to strengthen the Dollar. This further supports a higher USD/JPY exchange rate. To prepare for potential swift movements, buying USD/JPY call options is a smart move. The one-month implied volatility has already risen to 12.5%, indicating that the market expects significant price changes as the election announcement approaches. This strategy allows traders to benefit from upward momentum while clearly knowing their maximum risk based on the premium paid.

Potential Government Action

Nevertheless, traders should remain cautious about potential government actions as the exchange rate nears 162. It’s worth recalling that in late 2022, the Ministry of Finance intervened directly in the market, and throughout 2024, they issued strong verbal warnings when the Yen weakened past similar levels. Any indication of government resistance could lead to a sharp but likely temporary reversal. Thus, traders should also consider setting alerts for downside protection, such as buying put options if key support levels from early 2025 are broken. If PM Takaichi fails to maintain her mandate or if the election results are surprising, this could quickly reverse current trends. This ensures a balanced approach to the high-stakes political situation unfolding. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now