Philip Wee from DBS Group Research explores the effects of elections on USD/JPY expectations and sentiment.
by VT Markets
/
Feb 9, 2026
DBS Group Research analyst Philip Wee examines changes in expectations for USD/JPY after Japan’s recent snap election and the “Takaichi Trade.” The Liberal Democratic Party’s win might boost the Japanese Yen, as markets could be overestimating risks tied to Japanese Government Bonds.
There are still risks for the Dollar, which makes it unclear if USD/JPY will keep rising. The nomination of Kevin Warsh as the next Fed Chair adds uncertainty about interest rates and his ability to maintain the Fed’s independence.
It’s also uncertain how much Warsh agrees with Treasury Secretary Scott Bessent on shrinking the Fed’s balance sheet. Additionally, Trump is reportedly worried about USD/JPY going above 160, as it may undermine his trade agenda.
Market expectations for a strong increase in USD/JPY after Takaichi’s victory are being closely examined. The FXStreet Insights Team gathers thoughts from leading experts, along with extra internal and external analysis.
We remember the doubts surrounding the “Takaichi Trade” after the February 2025 snap election. That skepticism turned out to be accurate as the yen strengthened after an initial sell-off, and the expected rise in USD/JPY above 160 did not happen. This history of the market reacting by “selling the fact” makes us cautious about predictions of dollar strength now.
The risks for the US dollar we pointed out last year, amid the uncertainty of Warsh’s Fed nomination, have become clearer. The latest US CPI data from January 2026 shows that inflation has fallen to 2.8%. As a result, markets now see a 60% chance of a Fed rate cut by the third quarter. This is a sharp contrast to the hawkish outlook of early 2025 and weakens support for the dollar.
At the same time, the case for a stronger yen is growing, marking a significant change from last year. Early reports from the ongoing “Shunto” spring wage negotiations in Japan show that large companies have agreed to average pay increases over 4.2%, the highest in decades. This consistent wage pressure makes it likely that the Bank of Japan will end its negative interest rate policy within the next two meetings.
For derivative traders, this environment suggests preparing for yen growth. The one-month implied volatility for USD/JPY has jumped from 9% to 13% in recent weeks, indicating that the market is ready for a big change. We think buying JPY call options or setting up bear put spreads on USD/JPY are smart strategies to take advantage of the growing difference in policies between a dovish Fed and a hawkish Bank of Japan.
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