The Japanese yen continued its downward trend, reaching its weakest level against the US dollar since February. This decline follows Sanae Takaichi’s unexpected victory as the new leader of Japan’s Liberal Democratic Party, a development that has placed considerable pressure on the domestic currency. The yen weakened to 151.93 against the greenback and hit a new record low against the euro since its creation in 1999.
Market expectations for an interest-rate hike by the Bank of Japan (BOJ) have diminished following Takaichi’s win. Takaichi, expected to become Japan’s prime minister on October 15, has signalled a preference for a cautious approach to rate increases by the BOJ, emphasising close collaboration between the central bank and the government. One of Takaichi’s economic advisors suggested a rate increase in December would be more appropriate, just weeks before the BOJ’s next meeting.
Analysts suggest Takaichi’s government will likely push for a stronger economy, influencing fiscal and monetary policy. “The ‘Takaichi trade’ has indeed delivered a steeper yield curve, an equity rally and a weaker yen,” ING analysts Chris Turner and Francesco Pesole noted. In response to the election results, Bank of America adjusted its forecast for the yen, anticipating it to end the year at 155 per US dollar, a revision from its previous outlook of 153. Deutsche Bank has also shifted its stance on the yen from bullish to neutral.
The cost of hedging against further yen depreciation has increased, with the premium to protect against the yen falling relative to the dollar over the next month reaching its highest point in over three years. This reflects increased uncertainty and volatility surrounding the Japanese currency.
