Analysts at MUFG Bank note that Japan’s upcoming election on February 8 is putting pressure on the Japanese Yen. After briefly falling to 152, the USD/JPY exchange rate is creeping back toward 160 due to political changes in Japan. Reports indicate that Prime Minister Takaichi’s ruling coalition is expected to gain a majority in the lower house. This could create political stability but may also lead to increased government spending, which raises concerns about fiscal responsibility. As a result, we might see continued upward pressure on the USD/JPY rate, influencing the yields on long-term Japanese Government Bonds (JGBs). The FXStreet Insights Team shares observations from market experts and various analysts. Their insights reflect how political shifts can impact currency and bond markets. About a year ago, we closely monitored Japan’s political situation as the February 2025 election pushed USD/JPY back toward 160. The market accurately predicted that Prime Minister Takaichi’s win would lead to more expansive fiscal policies. This created a pattern where increased government spending directly weakens the yen. Our worries about fiscal responsibility were confirmed when a larger-than-expected ¥25 trillion stimulus package was approved in April 2025. Following that, USD/JPY surpassed its previous highs, eventually reaching 163.50 in summer 2025. The yield on the 10-year Japanese Government Bond also rose from around 1.0% to over 1.3% during this time, showing the impact of increased bond issuance. As we approach the upcoming weeks, traders should use last year’s events as a guide. With talks of a new supplementary budget to boost a slowing economy, preparing for another round of yen weakness seems wise. Buying long USD/JPY call options with a strike price around 162 or 163 might offer substantial gains if history repeats itself. We can also look back at early 2025, which saw a sharp rise in volatility leading up to the budget announcement. Currently, USD/JPY 3-month implied volatility is around 9%, lower than the 12-13% we experienced during that uncertain time. This suggests that options may be relatively inexpensive, making strategies like buying straddles appealing for those expecting another wave of significant policy-driven currency movements.

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