Recent polls in Japan show that the approval ratings for the ruling Liberal Democratic Party (LDP) are falling as elections approach. This drop could impact the Japanese Yen, which has recently strengthened against the US Dollar amid growing political uncertainty. These findings suggest that the LDP may find it difficult to gain votes and seats in the House of Representatives compared to the last election in 2024. With lower odds of winning an absolute majority, there may be limited fiscal expansion after the elections.

Polls Indicate Political Uncertainty

Polls reflecting challenges for the LDP are creating a complicated situation for the Japanese Yen. As political uncertainty rises, the JPY is appreciating against the USD. This indicates that traders should prepare for a stronger yen rather than a weaker one. Looking back at 2025, a similar pattern emerged when the prime minister’s approval rating dropped below 30% in several polls, a record low not seen in over a decade. As a result, implied volatility on USD/JPY options for the one-month duration increased by more than 15%, signaling the market’s expectation for greater currency fluctuations. This historical context influences our current strategy. Given this situation, we see an opportunity to buy options that benefit from a stronger yen. Purchasing Japanese Yen call options or US Dollar put options can directly position investors for JPY appreciation. This approach allows for defined risk while capturing potential gains if the LDP’s political support continues to decline.

Market Strategies for JPY Strength

The polls also decrease the chances of a significant fiscal expansion package after the election. In the past, major stimulus plans in Japan have often resulted in a weaker yen due to increased government bond issuance. A more fiscally conservative approach could eliminate this obstacle, further supporting a stronger currency. We should keep an eye on the options market for changes in sentiment, especially through risk reversals. During a similar political climate in 2025, the one-month 25-delta risk reversal for USD/JPY shifted to favor JPY calls, indicating market bias. Establishing positions like bearish risk reversals on USD/JPY could effectively position for a decline in the currency pair. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now