Japanese Yen Outlook: USD/JPY Upside Risks Rise After Takaichi Landslide

Summary

The recent decisive victory of Japanese Prime Minister Sanae Takaichi in the lower-house election has significantly altered the policy landscape, increasing the upside risks for the USD/JPY currency pair. While the election result provides Takaichi with a strong mandate to pursue reflationary policies, it also introduces potential constraints, particularly regarding yen intervention and upcoming US economic data that could lead to volatility.

Supermajority Secured

Takaichi's coalition has achieved a two-thirds supermajority in the lower house, a result that was anticipated based on pre-election polls. This supermajority allows the government to bypass the upper chamber, facilitating the passage of budgets and reforms that may have previously faced obstacles.

The implications for the market are significant, as Takaichi's mandate may enable her to implement more aggressive reflationary policies than previously expected, potentially impacting the yen's value.

Reflation Risk Back in Play

The election outcome has led to shifts in the Japanese Government Bond (JGB) market, with yields reacting to Takaichi's proposals, including a suspension of the food sales tax. The market's response has been characterized by a bear steepening of the yield curve, although this trend has been moderated by the Bank of Japan's (BOJ) indication of increased bond purchases.

Despite Takaichi's less aggressive tax proposal compared to her rivals, her electoral success may provide her with the leverage to push for more substantial fiscal measures, raising the risk of renewed bear steepening in the JGB market.

The Intervention Overhang

Finance Minister Satsuki Katayama has reiterated that the government is closely monitoring foreign exchange movements and is prepared to intervene if the yen weakens excessively. This is particularly relevant as USD/JPY approaches levels seen earlier in the year, where previous interventions had occurred.

The current environment suggests that while the government may act to stabilize the yen, any intervention may be limited without strong fundamental support.

Event Risk Stacked

The upcoming week features a heavy US economic calendar, including retail sales, payrolls, and CPI data, which could introduce significant volatility for USD/JPY. The payrolls report is particularly critical, as it will influence expectations regarding US interest rates and the dollar's strength.

Japanese wage data is also on the agenda, with potential implications for BOJ rate hike expectations, which could further affect USD/JPY dynamics.

USD/JPY Upside Bias, but with Caveats

Technically, the outlook for USD/JPY has improved, with bullish signals emerging. Key resistance levels to watch include 157.50, which, if surpassed, could lead to further gains towards the 2026 year-to-date high of 159.45. However, intervention risks remain a significant factor that could temper any upward movement.

Conversely, if the market experiences downside pressure, key support levels include 156.50 and 156.00.