USD/JPY Takes on a “Political Market” Tone

USD/JPY Takes on a “Political Market” Tone

— Assessing How Much the Dissolution / General Election Scenario Is Already Priced In

In the Tokyo market after the long holiday weekend, yen weakness has accelerated.
USD/JPY climbed to just below 159, marking its strongest dollar / weakest yen level since July 2024.
Yen crosses also surged across the board:

• EUR/JPY: moved into the 185 zone

• GBP/JPY: pushed toward the 214 area

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◆ The Trigger: “Dissolution and General Election” Speculation

The main driver behind the weaker yen is growing speculation that Prime Minister Takaichi will dissolve the lower house and call a general election.

• Late last week (NY session): reported by Yomiuri Shimbun

• Today: Kyodo News followed up, reporting

  “Prime Minister Takaichi has conveyed her intention to dissolve the House of Representatives.”

This immediately triggered the market narrative:

Political shift → faster fiscal expansion → JGB selling → weaker yen

That said, price action is beginning to stall just ahead of 159, suggesting some caution about crowded positioning.

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◆ A Rare Combination: “Japan Selling” and “Equity Buying” at the Same Time

If the ruling party strengthens its grip under Takaichi’s high approval ratings:

• Aggressive fiscal policy becomes easier to implement

• Fears of expanding deficits → JGB selling

• → “Japan selling” → weaker yen

At the same time:

• Expectations for economic stimulus

• Perceived political stability

• → Buying of Japanese equities

In other words:

Bond selling (yen weakness) + stock buying (risk-on)
→ Both forces pushing the yen lower

This is a rare and powerful configuration.

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◆ How to View the Psychological Level of 160

The key issue is that USD/JPY is now approaching the major psychological level of 160.

Finance Minister Katayama has reportedly:

• Repeatedly raised concerns with U.S. Treasury Secretary Bessent

• About the need to address excessive yen weakness

Therefore, the market is now watching closely:

Whether the U.S. side will issue any verbal warnings on FX.

This is the main risk factor from here.

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◆ Main Event Ahead: U.S. CPI (December)

In overseas markets, the U.S. Consumer Price Index will be the biggest event.

Market expectations:

Headline inflation is expected to be unchanged,
while core inflation is seen slightly accelerating.

This report will decide whether inflation is re-igniting or continuing to cool,
and therefore set the direction for the USD.

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◆ Other Economic Data

• Turkey: Current account (Nov)

• France: Fiscal balance (Nov)

• Canada: Building permits (Nov)

• U.S.: New home sales (Oct)

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◆ Speeches & Events

• Holzmann, Governor of the Austrian central bank

• Bailey, Governor of the Bank of England

• Musalem, President of the St. Louis Fed

• Barkin, President of the Richmond Fed

• Himino, Deputy Governor of the BoJ (attending a BoE-hosted meeting)

Also in focus:

• U.S. 30-year Treasury auction (USD 22bn)

• Corporate earnings:

  • BNY Mellon

  • JPMorgan

  • Delta Air Lines

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◆ London FX: Hesitation Just Below 159

Early in the London session:

• USD/JPY reached 158.97, marking the day’s high

• But traders remain cautious about a clean break above 159

• Nervous price action reflects heavy sell orders around the 159.00 area

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🔎 Summary

• USD/JPY is now fully a politically driven market

• Election speculation is triggering both “Japan selling” and “Japanese equity buying”

• 160 is the line between:

  • Intervention risk

  • And potential U.S. verbal pressure

• Tonight is a critical junction where:

  Japanese politics × U.S. CPI × U.S. FX policy stance
  all intersect.