The Japanese yen has experienced a considerable downturn since the beginning of the year, reaching levels against the U.S. dollar not seen in the past 18 months. On Wednesday, the USD/JPY currency pair traded down 0.5% to 158.36 yen at 10:30 ET (15:30 GMT), retreating from an intraday peak of 159.45 yen, which marked its highest point in over a year.
This depreciation has been attributed to concerns surrounding the prospect of looser fiscal and monetary policies in Japan. Market commentators have linked the yen's slide to speculation that Prime Minister Sanae Takaichi might call an early snap election. Such political developments could impact the legislative timetable, potentially delaying parliamentary approval for bills authorizing the government to issue bonds aimed at covering fiscal deficits.
According to Kit Juckes, Societe Generale’s chief FX strategist, the futures market showed a significant net short position on the yen in 2024, which corresponded with USD/JPY climbing above 160 yen. He explains that the current movement partly unwinds the long yen positions accumulated during the early months of 2025. This phenomenon represents a round-trip trade where the USD/JPY rate moved from 159 yen down to 140 yen before rallying back to 159 yen.
Juckes notes skepticism regarding claims that either 30-year Japanese Government Bond (JGB) yields or the USD/JPY currency rate have reached their respective peaks. Societe Generale emphasizes that even if the ruling party secures a majority in the Lower House, immediate aggressive fiscal expansion seems unlikely due to debt sustainability concerns.
Further, the bank highlights the absence of near-term issuance of long-term government bonds combined with a current policy focus on reclaiming Liberal Democratic Party (LDP) seats in the Upper House. These factors together support a "buy the dip" approach for long-term JGBs. Juckes extends this logic to the yen as well, suggesting that a potential spike in USD/JPY could provide a strategic opportunity to undertake short positions against the currency.