Forex Top Team

Back to all insights

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

◆ 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.

◆ 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.

◆ 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.

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

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

Market expectations:

Indicator Forecast Prior
CPI YoY +2.7% +2.7%
Core CPI YoY +2.7% +2.6%
CPI MoM +0.3% —
Core CPI MoM +0.3% —

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.

◆ Other Economic Data

  • Turkey: Current account (Nov)

  • France: Fiscal balance (Nov)

  • Canada: Building permits (Nov)

  • U.S.: New home sales (Oct)

◆ 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

◆ 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

🔎 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.

More Insights