Is this a currency war? Trump strikes at the dollar, and Sanae Takaichi weakens the yen.
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The global forex market is facing a dual political shock: on one side is Trump’s trade stick pressuring the dollar, and on the other is Japanese Prime Minister Sanae Takaichi’s fiscal stimulus weighing on the yen.
According to Chasewind Trading Desk, a report released by Nomura Securities Global Market Research Team on January 19 shows that the current exchange rate market is dominated by the political agendas of the US and Japan.
Although US economic data still appear resilient, political risks have become the key driver of a weaker dollar; meanwhile, in Japan, despite global risk-aversion sentiment, the yen failed to play its traditional “safe haven” role and was instead sold off due to expectations of aggressive domestic fiscal policies.
Trump’s “Greenland Tariffs” Deal a Heavy Blow to the Dollar
Nomura’s report pointed out that Trump’s tough stance on the Greenland acquisition issue has triggered a new round of US-European trade conflict. Trump announced that if European nations do not cooperate with his decision on Greenland, he will impose additional tariffs on eight European countries starting February 1.
According to CCTV News, US President Trump recently stated that he will levy an additional 10% tariff on eight European countries opposing his Greenland acquisition, which will rise to 25% in the coming months, until an agreement is reached on the “complete and total purchase of Greenland.”
This geopolitical tension directly impacted market risk sentiment at the beginning of the week. While US stocks fell, the dollar did not appreciate as it used to in “risk-off” scenarios, but instead weakened broadly against G10 currencies. Nomura analysts point out that this market reaction is similar to “Tariff Liberation Day” in April 2025.
This signals to investors: “Although recent US data show resilience, risks on the political level may weaken the dollar this year.” Over the entirety of 2025, the US Dollar Index plummeted about 9.5%.
Sanae Takaichi’s “Unexpected” Tax Cut Pressures the Yen
Against the backdrop of dollar weakness, the yen did not show significant strength among G10 currencies; instead, its exchange rate fell below 158, approaching the key 160 mark. Nomura attributes this mainly to internal Japanese political factors, particularly Prime Minister Sanae Takaichi’s policy shift.
According to Xinhua News Agency, Japanese Prime Minister Sanae Takaichi stated at a press conference on the 19th that she will dissolve the House of Representatives on January 23, seeking voter authorization to continue her administration, and will hold parliamentary elections on February 8. The current term for members of the Japanese House of Representatives was originally scheduled to expire in October 2028.
Although the election itself has already been priced in by the market, her economic program caught the market by surprise.
“She confirmed plans for a temporary two-year reduction in food consumption tax, which surprised the market.”
Nomura emphasized that in last year’s LDP presidential election, Sanae Takaichi had a negative view of tax cuts, believing their effects to be limited. However, to win the upcoming House election, it appears this policy has become the core measure of her “responsible and proactive fiscal policy” platform.
Given that Japan’s main opposition party (Centrist Reform Alliance) also proposed permanently abolishing the food consumption tax, both sides of the Japanese political spectrum seem to be racing to include tax cuts in their platforms.
Japanese Government Bond Sell-Off Worsens Yen Weakness
The shift toward tax-cutting policies has led directly to market concerns over Japan’s deteriorating fiscal situation. Nomura points out this is a key factor causing Japanese Government Bonds (JGBs) to be sold off and dragging down the yen.
Data shows that Japan’s government bond yield curve on January 19 exhibited a “bear steepening,” with the 10-year JGB yield rising to 2.270%.
Nomura warns investors that, considering there are still several long-term and ultra-long-term JGB auctions during the campaign period (including tomorrow’s 20-year bond auction), dramatic fluctuations in long-end yields might, as seen last year, further increase the pressure on the yen to depreciate.
Although the market is worried about fiscal discipline, Sanae Takaichi’s political gamble seems to be paying off at the ballot box.
According to an early poll conducted by Asahi Shimbun on January 17-18, the ruling alliance formed by the LDP and Nippon Ishin no Kai (LDP-JIP) holds an advantage over the main opposition party. 69% of respondents believe the new opposition party, Centrist Reform Alliance, is not a strong contender against the ruling coalition.
Nomura summarizes that purely based on these results, Takaichi’s alliance is very likely to secure a majority in the upcoming election. But analysts also remind investors: “One should not overinterpret poll results as the electoral landscape can shift quickly.”
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