Political Market Continues to Drive USD/JPY – Conditions Remain Highly Fluid
Political Market Continues to Drive USD/JPY – Conditions Remain Highly Fluid
The USD/JPY market remains firmly in a “political-driven” phase.
Yesterday, the pair surged close to 160 before reversing sharply and falling back into the low-158s.
The initial yen weakness was triggered by expectations surrounding Prime Minister Takaichi’s plan to dissolve the Lower House.
With her strong approval ratings, markets anticipate a more aggressive fiscal stance, which led to:
-
Japanese equities buying
-
Selling of Japanese government bonds
-
Renewed pressure for yen depreciation
However, strong verbal warnings from:
-
Finance Minister Katayama
-
Vice Finance Minister Mimura
-
U.S. Treasury Secretary Bessent
about excessive FX volatility put the brakes on rapid yen selling. As a result, USD/JPY retreated sharply.
Political Uncertainty Around the Election
Details of the general election are expected to be officially announced by Prime Minister Takaichi on Monday (19th), with voting likely in early February.
This short, intense campaign leaves markets focused on whether:
Takaichi’s popularity will translate into broader confidence in the ruling coalition.
At the same time:
-
Constitutional Democratic Party and Komeito are exploring forming a new party
-
The stance of the Democratic Party for the People remains unclear
Political realignment risks are increasing, and the continuation of the so-called “Takaichi Trade” is no longer guaranteed.
Intervention Risk Adds to Market Nervousness
With political risk and FX intervention warnings coexisting:
USD/JPY is now vulnerable to sharp moves in both directions.
Volatility risk is structurally elevated.
Overseas Political Risk Is Calming—for Now
President Trump continues to exert influence over:
-
Ukraine
-
Gaza
-
Venezuela
-
Iran
-
Greenland
But currently:
-
Venezuela is showing a cooperative stance
-
Tensions with Iran appear to be easing
As a result, geopolitically driven risk-off flows are temporarily fading.
Politics Still Dominates, But U.S. Data Matters
Despite politics being the primary driver, a heavy slate of U.S. data is due at 22:30 JST:
United States
-
Import Price Index (Nov)
-
Export Price Index (Nov)
-
Initial Jobless Claims (Jan 4–10)
-
NY Fed Manufacturing Index (Jan)
-
Philadelphia Fed Index (Jan)
Expectations:
-
Both regional Fed surveys are forecast to improve
-
Jobless claims are expected to rise slightly
Canada (same time)
-
Manufacturing Sales (Nov)
-
Wholesale Sales (Nov)
Central Bank Speakers in Focus
A large number of central bankers are scheduled to speak, including:
-
De Guindos (ECB Vice President)
-
Panetta (Bank of Italy Governor)
-
Goolsbee (Chicago Fed)
-
Bostic (Atlanta Fed)
-
Barr (Fed Governor)
-
Barkin (Richmond Fed)
-
Schmid (Kansas City Fed)
Trump also stated he “will not dismiss Chair Powell,” signaling an attempt to calm fears about Fed independence.
London FX Session Highlights
-
Euro Rebound
Eurozone industrial production beat expectations, triggering euro buying.
EUR/GBP initially weakened but then reversed, showing “round-trip” price action. -
Yen Strength on BoJ Headlines
Bloomberg reported comments from BoJ sources:
-
Faster rate hikes possible if yen weakness accelerates
-
Concern over inflation upside driven by FX
-
Acknowledgement of the negative impact of excessive yen depreciation
USD/JPY dropped sharply:
-
From 158.70 → 158.30 area
However, gains in the yen were capped by:
Reports that the BoJ is still expected to keep policy unchanged at its January meeting.
🔎 Summary
-
USD/JPY is now a pure political market
-
A complex mix of:
-
Takaichi election expectations
-
FX intervention risk
-
BoJ policy stance
-
U.S. political and Treasury signals
-
-
The market is extremely sensitive and prone to sudden reversals
-
For now, the main drivers remain:
Politics + BoJ + Ministry of Finance + U.S. policy signals
This is a market where sentiment can flip instantly.
