Japan’s ruling LDP party will hold a leadership vote on October 4 after Shigeru Ishiba stepped down. His resignation came after a defeat in the upper house election in July. This news impacted the Japanese yen, leading to a lower opening for trading. However, domestic stocks saw a relief rally in response.

New Party Leadership

The new party leader will be announced next month. This leadership change is likely to affect both politics and the economy. With the leadership vote set for October 4, uncertainty is rising, which influences derivatives pricing. The yen’s initial drop and the stock market rally indicate that investors are hopeful about new leadership. This situation is promising for volatility-based strategies leading up to the election. The Nikkei Volatility Index has already risen to 18.5, up from an average of 15 last month, showing that the market anticipates changes ahead. We suggest considering Nikkei 225 index options, like straddles, that profit from significant price movements in either direction before the vote. Historically, during the LDP leadership contest in 2021, the volatility index peaked shortly before the vote, creating a similar opportunity. For currency traders, the yen’s weakness is a trend to watch. The USD/JPY pair is currently trading above 158. If the leading candidates continue to support monetary easing policies, we expect the yen to stay under pressure. Buying call options on USD/JPY with expiration dates after October 4 could be a smart way to leverage this potential decline.

Equity Rally And Volatility

The equity rally, especially in export-focused sectors, is directly linked to the weaker yen. We recommend single-stock call options on major exporting companies, which stand to gain if the new leader supports pro-growth stimulus. Recent data from Japan’s Ministry of Finance showed exports increased by 4.2% year-over-year, a trend that a weaker yen would likely boost. As the election date approaches, implied volatility will probably peak, making options more expensive. Right after the October 4 announcement, volatility is expected to drop sharply as uncertainty fades. This “volatility crush” will mean that traders who bought options will need a significant market move just to break even, while those who sold volatility could earn profits. Create your live VT Markets account and start trading now.

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