Sanae Takaichi’s election victory eases “fiscal deficit” fears, yen poised for its best weekly performance since 2024

As the market believes that Prime Minister Sanae Takaichi’s victory will allow her to expand fiscal stimulus while maintaining financial market confidence, the yen is expected to post its largest one-week gain since November 2024.

The yen rose more than 0.3% on Thursday, strengthening for a fourth consecutive session, with a cumulative appreciation of about 2.8% this week. Meanwhile, sustained sell-offs in risk assets have also provided safe-haven support for the yen.

(USD/JPY one-hour chart, coordinates reversed, source: Wallstreetcn)

Analysts believe that Prime Minister Sanae Takaichi’s victory is being interpreted as reducing political uncertainty and the risk of the worst fiscal scenario, helping to drive the yen higher and prompting Japanese government bond yields to retreat from the multi-year highs touched last month.

Japan’s top currency official Atsushi Mimura said that although the yen has rebounded this week, the government remains highly vigilant about forex market movements. Concerns about potential government intervention to support the yen have also limited its downside.

Fiscal Policy Concerns Easing

At a press conference on Monday, Sanae Takaichi acknowledged market concerns about the two-year food consumption tax reduction plan and reiterated that bonds will not be issued to finance this measure. This statement further eased market worries about fiscal deterioration.

Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank in New York, said:

Following the overwhelming victory of the Liberal Democratic Party, the fading of fiscal concerns and expectations for BOJ rate hikes have fueled the trend of yen strength.

Overnight index swaps show the probability of a Bank of Japan rate hike in April is about 78%.

Bloomberg strategist Michael Ball noted that the yen strengthened after Sanae Takaichi secured a historic win for the LDP, as traders are pricing in a rarely-seen policy mix in Japan: tax cuts that won’t worsen the deficit, potentially funded from internal pools.

Ball emphasized that the risk of this policy mix is that it may involve selling foreign exchange reserves, which would support yen buying in the short term but increase volatility, as the market cannot anticipate how far officials are willing to go.

Market Speculation About Japanese Government Intervention

The highly vigilant stance of Japan’s top currency officials towards forex movements has kept market concerns about potential government intervention alive, and this expectation itself is also limiting the yen’s downside.

Wallstreetcn mentioned that on January 23, the yen’s biggest intraday gain was about 1.75%, the largest since August last year. This sudden move sparked widespread speculation that the Japanese government might be intervening in the foreign exchange market, and possibly even joining with the US government.

But US Treasury Secretary Besant later stated that the US consistently adopts a strong dollar policy and "absolutely will not" intervene in the forex market to support the yen. Japanese Finance Minister Katsuki Katayama said she maintains close contact with Besant, and both share responsibility for maintaining stability in the USD/JPY exchange rate.

JPMorgan forex strategist Pat Locke previously stated:

Besant’s comments about not intervening do not exclude further verbal intervention or even actual intervention. However, he reiterated a core stance that, in the long run, setting the correct fundamentals is crucial to the forex market—not only for the US, but also for other countries including Japan.

Investors will focus on Friday’s speech by BOJ “hawk” board member Naoki Tamura and US CPI data to judge the outlook for US-Japan interest rate spreads and the yen’s trajectory.

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