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Is the yen collapsing? Sanae's coming to power triggered a secret war on policy
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Hello everyone, today XM Forex will bring you "[XM Forex Platform]: Has the Japanese Yen Collapse? Will Sanae www.xmltrust.come to power to trigger a secret war on policy?" Hope this helps you! The original content is as follows:
After the opening of the European trading session on Thursday, USD/JPY tried to break through the 153.00 mark, but failed to hold this level and subsequently gave up some of its gains. However, the currency pair is still consolidating in a nine-month high range, and the downside is currently limited to the 152.40 mark.
Investors are still worried that Sanae Takaichi's unexpected victory in the election of the ruling Liberal Democratic Party may start a new round of fiscal easing cycle, and this will put policy pressure on the Bank of Japan, forcing it to continue its loose monetary policy stance and depreciate the yen. However, in fact, there may be a secret policy war behind such a pessimistic event. We have summarized recent events and opinions in the market, and made an outlook on the subsequent trend of the yen
Affected by the government, the Bank of Japan will temporarily maintain low interest rates
On Thursday, the new leader of the Liberal Democratic Party (and a high probability of becoming the next prime minister) Takaichi Sanae's economic adviser Etsuro Honda publicly stated that the Bank of Japan should be "cautious about raising interest rates," which further confirmed the market's previous concerns.
Honda Etsuro said that the time for the next interest rate hike is still unclear, and the depreciation of the yen has a positive effect on economic recovery - this statement further strengthens the policy pressure of the Bank of Japan to postpone subsequent tightening actions.
In addition, if the Komeito party withdraws from the coalition government, Yuichiro Tamaki may be elected as the new prime minister in the prime minister nomination vote, which has caused concern.
Given the uncertainty of the political situation, the market needs to remain cautious.
Inflation is expected to be lower, and the slowdown in exports is not conducive to raising interest rates
This morning, Japan announced that the growth rate of labor force cash income slowed down in August, year-on-yearGrowth was 1.5%, www.xmltrust.compared with the previously revised growth rate of 3.4% (initial value was 4.1%). After adjusting for inflation, real cash receipts fell 1.4% year-on-year, and the July data was also revised to a decrease of 0.2% from an initial increase of 0.5%. However, as data released yesterday showed, the slowdown in income growth has not curbed Japanese household spending, with the indicator still growing 2.3% year-on-year.
In addition, Japan's current account surplus expanded to approximately 3.78 trillion yen in August, which was an increase from 2.68 trillion yen in July, but lower than 3.97 trillion yen in August 2024; during the same period, the trade deficit narrowed from 1.895 trillion yen in July and 3.855 trillion yen in August 2024 to 105.6 billion yen. Despite the weakness of the yen, the market generally believes that the new Liberal Democratic Party government that will take office may hinder the Bank of Japan from raising interest rates. Last weekend, the swap market's pricing for the Bank of Japan's interest rate hike also implied a range of 14 basis points. On Monday, the range dropped to just under 5 basis points. It has now risen slightly to just over 6 basis points.
The depreciation of the yen is conducive to Japan's fundamentals and ultimately feeds back the value of the yen
Honda believes that the moderate depreciation of the yen is beneficial to the economy during the economic recovery stage. Japan's domestic market has achieved growth due to the tourism consumption boom, and the weak yen further amplifies the book value of overseas earnings converted into yen. But a sharp depreciation beyond 155 yen to the dollar is expected to be unlikely.
Market expectations for the Bank of Japan to raise interest rates have cooled significantly. The probability of raising interest rates at the end of October has dropped to 27%, and the probability of raising interest rates in December is 44%.
High market trading and macro hedge funds are a major driver of the short-term depreciation of the yen
In today's Tokyo foreign exchange market, the market expects that the U.S. dollar will continue to "high market trading" (i.e., sell Japanese yen, sell Japanese government bonds, and buy Japanese stocks) against the yen, taking advantage of the political vacuum period before the appointment of the next prime minister.
After Sanae Takaichi was elected as the new president of the Liberal Democratic Party (LDP) on the 4th, driven by speculation on Sanae Takaichi’s economic policy known as “SanAE economics”, “high trading” (selling Japanese yen, selling Japanese government bonds, buying Japanese stocks) pushed the U.S. dollar to 153.00 yen against the yen.
The formation of the new cabinet must wait for the extraordinary parliamentary meeting scheduled to be held on the 15th to select the next prime minister; however, there are reports that the meeting may be postponed to around the 20th.
During this political vacuum, the market’s sell-off of the yen is likely to continue.
According to market sources, speculative investors were forced to close their long yen positions that they still held as of the end of last week.
Currently, they are preparing for further strength in the U.S. dollar and further weakness in the yen through Japanese yen carry trades and U.S. dollar call options.
Macro hedge funds traded in yen on Monday, according to traders at Nomura International and CitigroupActivity is extremely high, with a large portion of the flows reflecting "massive liquidations" of bullish positions rather than newly opened bearish bets.
Market expectations that Sanae Takaichi's victory may promote fiscal stimulus and slow down the pace of interest rate hikes by the Bank of Japan. Against this background, the U.S. dollar against the yen surged nearly 2%.
Many funds are buying dollars primarily to cover existing short positions rather than establish new bearish exposures, traders said.
Antony Foster, head of G10 spot trading at Nomura's London branch, said: "In my view, this is a massive liquidation." A specific operation. Some are closing positions, and some are longing the US dollar, but the main flow of funds seems to be the former. "
Activities in the options market also reflect these trends, but it is worth noting that these are thrusts, but when the time www.xmltrust.comes, they will www.xmltrust.completely cause the Japanese yen to move in the opposite direction, and these are short-term boosts that do not have long-term nature.
A sharp depreciation of the yen is not in the interest of the United States
The Trump administration maintains a weak dollar stance and is trying to reduce the trade deficit by raising tariffs.
According to reports, U.S. Treasury Secretary Bessent had telephone talks with Bank of Japan Governor Kazuo Ueda in February and August, asking Japan to raise interest rates to curb the depreciation of the yen. During the talks on February 5, the U.S. dollar-yen exchange rate traded in the 152-154 yen range.
In 2024, after the U.S. dollar broke through the 161 yen mark against the yen, the trend of a stronger U.S. dollar and a weaker yen was reversed. This reversal was driven by the intervention operation of selling U.S. dollars and buying Japanese yen led by Kadota, the then Finance Minister. Based on this, the market defined 152 yen as the "Kadota ceiling."
At the beginning of this week, when the U.S. dollar exceeded the 150 yen mark against the yen, Etsuro Honda, the economic adviser to former Liberal Democratic Party President Shinzo Abe (and now the economic adviser to Liberal Democratic Party President Takaichi Sanae), stepped in to curb excessive exchange rate fluctuations. Finance Minister Kato also issued a warning against excessive exchange rate fluctuations.
However, there is currently little sign that Japan’s domestic monetary authorities have the will to effectively prevent the depreciation of the yen.
In 2025, driven by multiple factors such as monetary policy differentiation, the unwinding of Japanese yen carry trades, and risk preference position adjustments, the U.S. dollar has appreciated sharply against the Japanese yen, which has become the core focus of global investors.
The role of the Japanese yen as a safe-haven asset is shaking
As discussed in the European Central Bank (EBC) forecast, although the Japanese yen tends to appreciate in global risk-off cycles based on historical performance, the reliability of its safe-haven properties has been questioned in the context of US fiscal concerns and changes in market sentiment.
For investors, the core lesson is the need to hedgeSudden changes caused by arbitrage trade capital flows and policy differentiation.
The unwinding of yen carry trades has shown how quickly funds can be reallocated, creating both risks and opportunities.
Investors with USD/JPY exposure need to pay close attention to policy www.xmltrust.communications from central banks, especially the Federal Reserve’s inflation outlook and the Bank of Japan’s stance on raising interest rates.
In the United States, the minutes of the Federal Reserve's September meeting did not reverse market expectations. The market still generally believes that the Federal Reserve will cut interest rates again in October, and there is a high probability of further interest rate cuts in December.
The U.S. government is currently in a state of shutdown, and core fundamental data are missing due to the shutdown, making it difficult to revise the above expectations. Traders will focus on the speeches of Federal Reserve Chairman Jerome Powell and Vice Chairman for Supervisory Affairs Michelle Bowman later today.
Conclusion:
The sharp appreciation of the US dollar against the Japanese yen in 2025 is the result of the joint action of multiple structural forces: covering the unwinding of Japanese yen arbitrage trades, differentiated monetary policies and dynamically adjusted risk appetite positions.
Although the U.S. dollar’s dominance appears to be solid in the short term, the fragility of carry trade strategies and the yen’s potential recovery highlight the need to implement dynamic risk management, that is, there is no basis for long-term depreciation of the yen.
As global markets evolve in this www.xmltrust.complex environment, investors need to remain flexible and balance the pursuit of yield opportunities with the reality of a rapidly changing monetary policy environment.
The above content is all about "[XM Foreign Exchange Platform]: The yen collapsed? Sanae came to power and triggered a secret war on policy". It was carefully www.xmltrust.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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