The USD/JPY currency pair has dropped after hitting 148.57 earlier. This follows the resignation of Japanese Prime Minister Ishiba, which was expected but is still affecting the markets. Initially, the pair opened higher but is now tightening as European markets start trading, moving from 148.00 to 147.60. Traders are watching closely to see how this political shift will impact the Bank of Japan’s rate plans.

Political Instability and Market Concerns

Ishiba’s resignation might create political instability that affects the Bank of Japan’s decisions, but there are no immediate concerns. Japan’s ruling LDP party will look for a replacement and aims to improve public perception ahead of the 2028 elections. Despite the resignation, the Bank of Japan is likely to keep its policies running smoothly. While the situation might influence public sentiment, Japanese stocks remain strong. After Prime Minister Ishiba resigned over the weekend, USD/JPY jumped to 148.57 before falling back to 147.60. The market’s first reaction suggested that this political news could delay the Bank of Japan’s planned rate hikes. This initial move offers a potential trading opportunity as the gap begins to close. The fear of political instability affecting the BOJ seems overstated, implying that the yen’s weakness could be temporary. We believe the BOJ can independently manage its policies regardless of changes in party leadership. Betting on a stronger yen soon seems reasonable given the overreaction.

Monetary Policy Divergence

This outlook is supported by recent data showing Japan’s core inflation for August 2025 at 2.9%, remaining above the BOJ’s 2% target for over a year. Additionally, BOJ Governor Ueda recently suggested the need to normalize policy before the year ends. These fundamental factors likely hold more weight for the yen than any political leadership changes. Looking back, when Prime Minister Abe resigned in August 2020, the yen’s path was primarily influenced by monetary policy differences rather than political shifts. History indicates that economic pressures will overshadow current political issues quickly. For derivative traders, the recent rise in uncertainty has increased one-month implied volatility for USD/JPY to over 11%, up from the 8% average seen in August 2025. This spike makes buying USD/JPY put options an attractive choice to profit from a potential decline as the political situation calms down. Selling out-of-the-money call spreads could also be a sound strategy against further significant increases. However, it’s essential to remember that the other side of the currency pair is influenced by the US Federal Reserve. Fed meeting minutes from late August 2025 confirmed a hawkish approach, with policymakers ready to maintain higher rates longer to address ongoing service-sector inflation. This difference in policies will likely support USD/JPY, restricting how much the pair can fall. Create your live VT Markets account and start trading now.

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