JPY declines amid growing speculation of a snap election in Japan – OCBC

Japanese Yen Faces Pressure Amid Early Election Speculation

Growing expectations of snap elections in Japan have led to renewed weakness in the Japanese Yen (JPY), with the USD/JPY exchange rate approaching the 160 mark. This development has also contributed to higher yields on Japanese government bonds and a boost in local stock markets. According to OCBC currency strategists Sim Moh Siong and Christopher Wong, concerns about increased government spending are undermining the usual influence of interest rate differences, leaving the yen vulnerable and making new long positions in USD/JPY less appealing despite the heightened risk of official intervention.

USD/JPY Approaches 160 as Authorities Monitor Intervention Risks

Anticipation of early elections has triggered another round of yen depreciation against other major currencies, accompanied by rising JGB yields and stronger equities. The risk of intervention remains in focus as the USD/JPY nears 160, especially after reports that Finance Minister Katayama and US Treasury Secretary Bessent have both expressed concerns about the yen’s persistent weakness.

Prime Minister Takaichi is reportedly considering dissolving the Lower House for elections as soon as February 8 or 15, capitalizing on favorable public support. Such a move could help the ruling LDP strengthen its position and potentially lead to more aggressive fiscal stimulus, which in turn raises questions about fiscal discipline.

Although a narrowing gap between US and Japanese interest rates would normally suggest a weaker USD/JPY, ongoing fiscal concerns have diminished this effect. Consequently, the prospects for the yen remain muted, and the increased likelihood of intervention makes further gains in USD/JPY less attractive at current levels.