The Japanese yen has faced persistent pressure against the US dollar since the start of 2024, hitting an 18-month low earlier this week. Midday exchange rates on Wednesday indicated a slight correction downward, with USD/JPY trading at ¥158.36, retreating from a session high of ¥159.45, marking a temporary ebb after more than a year of persistent gains for the greenback.
Market participants have attributed the yen's depreciation to rising apprehensions about expanding fiscal and monetary easing in Japan. This shift follows speculation that Prime Minister Sanae Takaichi may call an early snap election. Such an election could delay parliamentary approval of legislation empowering the government to issue bonds aimed at covering fiscal deficits, injecting uncertainty into policymakers’ ability to manage national debt.
Kit Juckes, Chief FX Strategist at Societe Generale, noted that the futures market had established a substantial net short position against the Japanese yen earlier in the year. When this positioning culminated, the USD/JPY rate surged past ¥160. However, the recent moves have begun to unwind these long yen positions accumulated during early 2025, with the USD/JPY oscillating between ¥159 and ¥140 before returning to the ¥159 level.
Juckes emphasized the risks in assuming that either 30-year Japanese Government Bond (JGB) yields or the USD/JPY exchange rate have reached their respective peaks. Further volatility remains possible.
Societe Generale’s analysis also warns that even with a potential parliamentary majority, the Japanese administration might avoid immediate, substantial fiscal stimulus due to concerns over the sustainability of national debt. Additionally, a policy focus aimed at securing seats in the Upper House of Parliament combined with limited near-term bond issuance on the long end supports the viability of purchasing dips in long-dated JGBs. By extension, this framework similarly suggests that a short position in USD/JPY during imminent price spikes could prove advantageous.
This nuanced view proposes that recent increases in USD/JPY could represent a tactical opportunity for traders expecting the yen to rebound amid political and fiscal headwinds.