Will the Japanese prime minister pursue fiscal consolidation, as the IMF is urging? Alternatively, will she begin to use her power to engage in profligate spending? Sanae Takaichi’s actions will determine the trajectory of the USD/JPY pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The “Buy Japan” trade may soon come to an end.
- The weak yen is supporting exports.
- The IMF urged Japan to move forward with fiscal consolidation.
- USD/JPY trades can be considered on a breakout of the 152.7–153.95 range.
Weekly Fundamental Forecast for Yen
Traders on Forex are always getting caught up in the up-and-down swings. They go from Trump trading to “Sell America” and from the “Takaichi trade” to “Buy Japan.” As a result, USD/JPY has posted its biggest weekly decline since November 2024. However, tables may turn at any moment. All it takes is one wrong move by the Japanese prime minister.
Sanae Takaichi has become overly sensitive to market indicators. Looking at the USD/JPY rally ahead of the parliamentary elections, after the Liberal Democrats’ victory, she stated that financial stability was a priority. Then, at a meeting with Kazuo Ueda, she discussed only general issues, refraining from making recommendations on monetary policy. As a result, investors changed their perception of the yen. While confidence in the US dollar has been shaken by Donald Trump’s policies, confidence in the yen, on the contrary, has strengthened.
Japan Real GDP
Source: Bloomberg.
However, there is a difference between what the prime minister says and what she does. The sluggish growth of Japan’s economy in the fourth quarter, following a decline in GDP in the third quarter, calls for new fiscal stimulus measures. The government aims to increase the budget to a record $122.3 trillion and bond issuance to $29.6 trillion.
The IMF warns that tax cuts coupled with an increase in the overnight rate from 0.75% to 1.5% in 2026–2027 will significantly increase debt servicing costs and undermine financial stability. If Sanae Takaichi goes down this path, USD/JPY quotes are likely to surge again.
At the same time, the weakening of the yen may lend a helping hand to the government. Thanks to the devaluation, Japanese exports in January grew at their fastest pace in three years, which suggests that GDP may expand in the first quarter.
Japan’s Exports
Source: Bloomberg.
Considering all the above, markets see two scenarios, depending on what Sanae Takaichi will do.
Either she will stimulate the Japanese economy with large-scale fiscal stimulus and boost GDP, or she will become a financially responsible head of government and slow down inflation. The drawbacks of the first option are high consumer prices, and the second option is a decline in the Liberal Democratic Party’s approval ratings.
For Forex, the results are directly opposite. Sanae Takaichi’s move towards fiscal profligacy will likely spur USD/JPY quotes. On the contrary, fiscal consolidation and increased confidence in the yen will accelerate capital repatriation and push the pair down.
Weekly USDJPY Trading Plan
The second option seems more preferable, but it is not certain that it will be implemented. Therefore, one can place pending orders to buy and sell the USD/JPY pair at 153.95 and 152.7, respectively.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
