After the "flash crash," what’s next for the yen?

"Abe's successor" Sanae Takaichi won the LDP presidential election, triggering a "collapse" of the yen, with the USD/JPY exchange rate breaking through the 153 mark. Both Nomura and Citi agree that the yen will continue to fall in the short term, with Citi expecting USD/JPY to rise to the 154-155 range.

According to Windspeed Trading Desk, Nomura Securities stated in its latest report that political uncertainty has become the market focus. The Democratic Party has stated that it will not join the LDP-Komeito coalition for now. According to the latest NHK report, Japan’s Komeito Party plans to withdraw from its coalition with the LDP, and the Japanese ruling coalition is expected to disband this Friday.

Nomura stated that the coalition outcome will directly affect the yen trend. If the LDP governs alone, it could trigger a reversal of the “Takaichi trade,” causing a stock market decline, ultra-long-term government bonds to be sold off, and the yen to depreciate further.

Citi Bank’s analysis shows that, in the short term, USD/JPY could climb to the 154-155 range. However, Citi maintains a long-term view that, since the sharp drop of the exchange rate from a high of around 160 last summer, USD/JPY has been forming a large triangle top structure, with the neckline at around 140.

The Yen Breaks Through Key Resistance as Authorities Remain Silent

USD/JPY continued to rise after the London session opened, breaking through the 153 level. Although the yen’s depreciation has accelerated since the start of the week, Japanese authorities have yet to make any verbal intervention today, and the market appears to be testing the Takaichi government’s tolerance for yen weakness.

From the perspective of carry trade, the yen remains an unattractive currency. Despite heightened political uncertainty in Japan, the momentum behind the "Takaichi trade" persists, making it likely that USD/JPY will continue to move higher in the short term.

Citi’s analysis shows that last summer’s sharp decline in USD/JPY from about 160 to around 140 marked a turning point for the yen’s long-term downtrend. Since then, this currency pair has been forming a large triangle top, with the neckline at around 140 and centered around the 350-day moving average.

Ruling Coalition Negotiations Decide Yen’s Fate

The core of the current political pattern is whether the LDP-Komeito coalition can be maintained. Democratic Party leader Yuichiro Tamaki said that the party will not immediately join the LDP-Komeito coalition at the start of the extraordinary Diet session and refused to support a unified opposition candidate in the prime ministerial election.

If, as reported, the Democratic Party temporarily refuses to join the coalition, and Komeito withdraws from its alliance with the LDP, the LDP will face governing alone with a fragile legislative position.

Nomura Securities analysis points out that the outcome of the ruling coalition will have very different effects on the yen:

• Bullish scenario: If the LDP-Komeito coalition is maintained, or if a finance minister with less dovish policy stance is appointed, market concerns about supply and demand for Japanese government bonds will be alleviated, thereby supporting the yen.
• Bearish scenario: If the LDP ends up governing alone, political uncertainty will rise sharply, potentially triggering a reversal of the "Takaichi trade," a stock market drop, sell-off of ultra-long-term bonds, and further yen depreciation.

According to previous Nomura surveys, 59.6% of respondents expect an LDP-Komeito coalition, 28.9% expect an expanded coalition or an LDP-Democratic Party coalition, and 11.5% expect other scenarios.

"Sanae Economics" Is Not Abenomics 2.0; Long-term Technical Triangle Top for Yen Under Construction

Citi Bank emphasizes that Sanae Takaichi’s economic policies (“Sanae Economics”) are unlikely to be a simple reproduction of Abenomics 2.0, for three main reasons:

First, the LDP’s internal political landscape has changed. Former Prime Minister Taro Aso played a key role in Takaichi’s victory and now serves as LDP vice president, with his brother-in-law Shunichi Suzuki serving as LDP Secretary General. Both fundamentally oppose overly expansionary fiscal policies.

Second, the economic environment has fundamentally changed. Ten years ago, Japan faced deflation and yen appreciation; now it faces inflation and yen depreciation. The Nikkei 225 index has risen from about 10,000 to nearly 50,000.

Third, US Treasury Secretary Yellen and other American financial authorities have expressed concern over Japan’s expansionary fiscal policies and have publicly called for normalization of BOJ policy.

Citi Bank maintains its long-term view that, since last summer’s sharp drop in the exchange rate from about 160, USD/JPY has been forming a large triangle top pattern with its neckline near 140.

The pattern centers around the 350-day moving average (currently about 150), which has served as a support line during 2023-2024. Although USD/JPY may rise to the +1σ band in the short term, the triangle formation process remains intact.

Citi believes that when the exchange rate breaks below the long-term neckline, a long-term trend reversal will appear, but for the time being, it is necessary to revise downward the Q4 target.

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