Japan Awaits Reforms

USD/JPY

Key zone: 149.50 - 150.50

Buy: 151.00 (after correction to 150) ; target 152.50; StopLoss 150.30

Sell: 149.50 (on strong negative fundamentals) ; target 148.00; StopLoss 150.20

Japan has elected a new leader of the ruling Liberal Democratic Party — 64-year-old Sanae Takaichi, representing the ultra-conservative wing of the LDP. By tradition, she will also assume the post of Prime Minister, becoming the first woman in Japan’s history to hold this position.

A strong yen continues to create serious challenges for Japan’s economy. The country’s massive and growing public debt is compounded by the steadily increasing cost of servicing it — the yield on 10-year Japanese government bonds has almost reached 1.7%, while the benchmark rate remains at 0.5%.

Sanae Takaichi, a student and ideological successor of former Prime Minister Shinzo Abe, is a staunch supporter of a weak yen and an accommodative policy by the Bank of Japan. Her reputation combines a tough stance on foreign policy with a commitment to economic stimulus at home. She has already stated that closer coordination between the BOJ and the Japanese government is necessary — asserting that fiscal and monetary policy should ultimately be determined by the government.

The new Prime Minister has pledged to support small and medium-sized enterprises to boost wage growth (through subsidies) and has not ruled out lowering the consumption tax.

Such an approach increases the likelihood that the Bank of Japan will maintain its current interest rate levels and refrain from tightening monetary policy further in the near future. Against this backdrop, the Nikkei 225 index reached a new all-time high, putting additional pressure on the yen.

This policy is unlikely to please Donald Trump, who plans to visit Tokyo on October 27. If Takaichi refuses to change course (or at least promise to do so), U.S. tariffs on Japan may rise further, judging by the pattern of previous trade negotiations.

The Japanese stock market is full of optimism, soaring by 6.5%. Meanwhile, Japan’s long-term government bonds are being sold off — yields on 40-year JGBs have surged by 15.2 basis points to 3.538%.

The speculative rally in USD/JPY has pushed the dollar higher against many currencies through cross-pairs. The yen’s declining appeal boosts demand for higher-yield currencies. For example, the interest rate differential between Japan and Australia creates ideal conditions for further growth in the AUD/JPY pair.

At present, the volume of speculative capital in yen-related trades is very high. On Friday, the U.S. will release the NFP report — an event that traditionally triggers strong reactions in the yen. Regardless of the actual figures, this could be the moment when the long-awaited technical correction finally occurs.

So we act wisely and avoid unnecessary risks.

Profits to y’all!