The yen is facing challenges due to a recent leadership change in Japan after Prime Minister Shigeru Ishiba resigned. The new leader will likely impact the yen’s value and the Bank of Japan’s policies. Sanae Takaichi tends to favor easy monetary policies and fiscal stimulus, which could be negative for the yen. On the other hand, Shinjiro Koizumi is viewed as a reformist.

Yen Remains Weak

Michael Wan from MUFG Bank believes the yen might stay weak for a while. The Bank of Japan may hold off on rate hikes until the political situation is clearer. After Ishiba’s resignation, the yen started weak, with the USD/JPY rate near 148.10 due to a decline following the news. We expect an announcement for a leadership election date soon, likely in early October. Japanese media indicate that the ruling party will have elections around this time to select a new leader. This decision is crucial for the market, especially concerning the yen and Japan’s economic strategies. Following Ishiba’s resignation, the yen has weakened significantly, moving the USD/JPY rate close to 148.10. This political uncertainty means the Bank of Japan will likely pause any further interest rate hikes. The focus is now on the ruling party’s leadership election, which is anticipated in early October. With many possible policy outcomes emerging, we expect a sharp increase in implied volatility for yen currency pairs over the next month. Buying options like straddles or strangles on USD/JPY could be a wise move to benefit from significant price shifts, regardless of direction. We saw a similar increase in volatility during the LDP leadership transition in 2021, and this situation appears even more uncertain.

Impact of a New Leader

If Sanae Takaichi becomes a leading candidate, we may see more weakness in the yen due to her strong backing of aggressive monetary easing. In this case, buying USD/JPY call options or entering long forward contracts might be appealing, potentially aiming for rates above 150. This perspective is supported by the latest core inflation data from August 2025, which, at 1.9%, gives a dovish BOJ candidate freedom to delay policy tightening. On the other hand, if reform-minded candidate Shinjiro Koizumi becomes the frontrunner, the market might anticipate a quicker return to normal policies. In this scenario, the yen could quickly recover its recent losses, making protective put options on USD/JPY essential for hedging long positions. Following the small rate hikes earlier this year, any indication of a more aggressive stance could lead to a swift closing of yen short positions. Create your live VT Markets account and start trading now.

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