The USD/JPY is on a downward path, currently at 151.26, as observed by FX analysts Frances Cheung and Christopher Wong from OCBC. This drop is caused by the fall of the Takaichi trade, issues with political alliances, rising trade tensions between the US and China, and a lower USD/CNY rate. Political conflicts are expected to escalate ahead of the parliamentary session on October 21, where a new Prime Minister will be chosen. The Liberal Democratic Party (LDP) does not hold a simple majority, with only 196 seats in the Lower House, short of the 233 needed for a majority. This could complicate Takaichi’s policies or make it harder to approve new policies if she wins.

BOJ Policy Rate

BOJ’s Tamura suggests keeping the policy rate close to neutral and avoiding quick hikes without going into restrictive territory. Current economic conditions hint at a possible rate hike from the BOJ during the October Monetary Policy Committee meeting. However, bullish momentum is fading as the RSI declines. The risks appear to be trending downward, with support levels at 150.35 and 149.67 and a resistance level at 151.90. The decline in the Takaichi trade has lowered the USD/JPY value, and the near-term risks remain downward. Ongoing political struggles leading up to the October 21 vote for Prime Minister add considerable uncertainty. For derivative traders, this situation indicates a need to prepare for larger price fluctuations. The LDP’s challenge to achieve a majority, with their 196 seats, is a key factor affecting the pair. An October 15 *Nikkei* poll shows public support for the LDP at just 28%, highlighting the instability. This political stalemate likely means that any new leader will have to soften their policies, which could lessen the yen’s weakness.

Implications For Traders

The Bank of Japan is adopting a more hawkish stance, with board members noting the need for rates to normalize. This perspective is supported by recent Tokyo Core CPI data, which came in at 2.9%, remaining above the Bank’s 2% target for the 18th month in a row. A rate hike at the upcoming October meeting is becoming more likely, which could strengthen the yen. As a result, one-week implied volatility for USD/JPY has increased to over 12%, a sharp rise from 8% just two weeks ago. Traders may want to consider buying puts or setting up put spreads to prepare for a move toward the 150.35 support level. One-month risk reversals are also showing a bias for JPY calls, suggesting options traders are willing to pay more for downside protection. We recall the Ministry of Finance’s intervention in late 2022 and 2024 when the yen weakened past similar levels. While government intervention is less likely to prevent a stronger yen now, this history highlights the market’s sensitivity to abrupt changes. Additionally, the renewed trade tensions between the US and China further boost the yen’s attractiveness as a safe-haven currency. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now