Data shows that wage growth in Japan has slowed down again. Nominal wages increased by 1.5% compared to last year, but when adjusted for inflation, wages have dropped even more. So, even though nominal wages are rising since the pandemic, inflation is still cutting into what people can afford. This morning, the Japanese Yen is weaker against the USD. This shift is largely due to the recent election within Japan’s ruling LDP party. Sanae Takaichi has been elected as the first female chairperson of the party and is expected to make history as Japan’s first female prime minister on October 15.

Implications of Japan’s Political Shift

Takaichi will start by leading a minority government, which will mean working with other parties to get things done. Many people are unhappy due to high inflation and falling real wages. Any attempts at expanding fiscal policy might only make inflation worse, so a careful approach is needed. A stronger yen could help reduce inflation and improve purchasing power by lowering import prices, especially for food and energy. There’s a chance for the Yen to appreciate in the next few weeks. Political changes and how the government is formed will determine the direction of Japan’s currency and economic policies. Recent data highlights the continued financial pressure on Japanese households. Despite a nominal wage increase of 1.5% year-on-year, September’s CPI shows stubborn inflation at 2.8%. This means real wages have dropped again, reducing consumer purchasing power and adding stress to the incoming government. In response, the Yen has weakened, with the USD/JPY rate reaching 158.50. However, this decline seems more related to political uncertainty than wage trends. The choice of Sanae Takaichi as the new leader creates potential risk regarding her minority government and the possibility of policy errors.

Potential Opportunities for Traders

Unlike when Shinzo Abe took office in 2012, Takaichi’s administration can’t just boost spending without risks. If they do, it could make inflation worse, which is a key concern among the public. Therefore, the traditional strategy of weakening the yen to stimulate the economy is not politically favorable now. For derivative traders, this might mean that the recent yen weakness is overstated, presenting a chance to benefit. The government’s best move to fight inflation would be to strengthen the yen, which would lower the costs of imported energy and food. We might see a policy shift that could lead to a rapid appreciation of the yen in the coming weeks. Given this, traders should consider buying out-of-the-money puts on USD/JPY that expire in November or December 2025. If there is an unexpected policy announcement or strong statements from the new government, the pair could quickly drop to the 150-152 range. Strike prices around 155.00 or 152.50 offer a cost-effective way to prepare for such a drop. Traders should also keep an eye on implied volatility, which has been rising as the government transitions. Any surprise hawkish remarks from officials might lead to a spike in volatility, boosting the value of these long-option positions. The time right after the October 15 confirmation will be crucial for shaping the new policy direction. Create your live VT Markets account and start trading now.

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