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Why the Yen is Nervous

  • Modified: Tuesday, 15 July 2025 12:31 BST
  • Written by: Gary Howes

Image © Adobe Images


The upcoming upper house vote is introducing a political risk premium into the yen.

The Japanese yen stays under pressure ahead of Japan's upper house elections on July 20, as political uncertainty, fiscal concerns, and global yield dynamics weigh.

The yen has traded nervously in recent sessions, with USD/JPY climbing sharply to 147.65, reflecting a broad rise in U.S. Treasury yields and fresh concerns over Japan's fiscal outlook.

Analysts say the upcoming upper house vote is introducing a political risk premium into the yen, with parties pledging tax cuts and fiscal giveaways in a bid to shore up voter support.

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Hoping to retain power, the coalition plans to include cash handouts in their campaign pledges to help households cope with inflation, but it has resisted calls from opposition parties for tax cuts.

Moody's, the ratings agency, last week warned that post-election fiscal slippage could pose risks to Japan's credit profile, further fueling investor caution around the yen.

"The move higher in USD/JPY also reflects yen weakness ahead of this weekend’s Upper House election. The risk of the government losing its majority was highlighted by a poll in the Asahi Shimbun published today," says Lee Hardman, FX analyst at MUFG Bank Ltd.


Above: The rise in Japan's 30-year bond yield is a significant warning that the multi-decade spell of cheap borrowing is over, raising scrutiny of the government's fiscal plans.


The poll has a mid-point forecast has the LDP and their coalition partner Komeito on course to win just 43 seats. As there are 75 uncontested seats, the result would mean that they are on track to fall seven seats short of the 125 needed for a majority.

"USDJPY rose sharply higher over the last week amid a rise in UST yields, tariff implications, sell-off in longer-dated JGBs and upper house election uncertainty," says a weekly FX research note from OCBC, the Singapore-based bank.

In parallel, GBP/JPY has also risen, trading near 191.80, in part driven by broad yen softness and continued hawkishness from the Bank of England.

Despite the short-term rally in USD/JPY, OCBC strategists still see scope for yen strength over time.

"More broadly, we look for USDJPY to trend lower, premised on the USD sell-off story and Fed-BoJ policy divergence," analysts say, citing an expectation that the Federal Reserve cuts interest rates while the Bank of Japan continues to slowly raise rates.

"Wage growth, broadening services inflation and upbeat economic activities in Japan should continue to support BoJ policy normalisation although tariff uncertainty may temporarily delay [this]," OCBC said. "While the timing of BoJ policy normalisation may be deferred, policy normalisation is not derailed."

 

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