In early 2025, the Japanese yen has experienced notable depreciation, hitting an 18-month trough against the US dollar on Wednesday. At 10:30 ET (15:30 GMT), USD/JPY edged 0.5% lower, trading at ¥158.36 after earlier surpassing the one-year high of ¥159.45 within the same session.
The yen's decline has been driven by apprehensions surrounding Japan's fiscal and monetary stance. Speculation is mounting that Prime Minister Sanae Takaichi may call an early general election, potentially delaying parliamentary approval of legislation that would permit the government to issue deficit-covering bonds. This political uncertainty is aggravating concerns about looser fiscal policies, contributing to the yen's recent weakness.
Commenting on market developments, Kit Juckes, Chief FX Strategist at Societe Generale, noted that the currency’s recent moves reflect a complex interplay of futures market positioning and yield fluctuations. He pointed out that in 2024, robust net short positions on the yen preceded USD/JPY climbing above ¥160. The current retracement from ¥159 to around ¥140 earlier and a rebound back to ¥159 indicate a round-trip move rather than a clear trend.
Juckes cautioned market participants against confidently declaring peaks in either thirty-year Japanese Government Bond yields or the USD/JPY exchange rate. Societe Generale emphasized that even should the ruling party maintain a majority in the House, an immediate aggressive fiscal expansion is unlikely due to concerns about debt sustainability.
Furthermore, the bank highlighted that the limited near-term issuance of long-dated bonds, coupled with a political focus on regaining seats in the Upper House of the Japanese parliament, lends support to a 'buy the dip' approach regarding long-term JGBs. A similar rationale appears applicable to the yen itself, where upcoming price spikes might present prudent opportunities to short USD/JPY.
These insights indicate a market environment where persistent risks remain tied to policy timing and political developments, affecting currency and bond sectors significantly.