The Yen Loses Its Footing. Forecast as of 06.10.2025
Japan is about to see its first female Prime Minister. Yet, it wasn’t this fact that rattled financial markets — it was her emphasis on a stimulus-driven policy that became the catalyst for USDJPY’s surge. How long will it last? Let’s discuss it and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Markets reacted sharply to the new LDP leader.
- Hedge funds emerged as the primary beneficiaries of the USDJPY rally.
- The yen has lost its appeal as a safe-haven asset.
- A drop in the U.S. dollar below ¥149.9 would be a signal to sell.
Weekly Fundamental Forecast for Yen
What’s good for Japan’s stock market is usually bad for the yen. The election of Sanae Takaichi as leader of the ruling Liberal Democratic Party pushed the Nikkei 225 to record highs and USDJPY above the psychologically important level of 150. For the first time in history, Japan may be led by a woman, and her focus on economic stimulus is sending ripples through financial markets.
Sanae Takaichi is a proponent of Shinzo Abe’s “Three Arrows” policy. During her campaign, she stated that fiscal and monetary policies should remain under government control and that the Bank of Japan should not raise the overnight rate. As a result of her victory, the likelihood of the BoJ tightening in October fell from 60% to 25%. USDJPY jumped above 150, opening the week with a gap.
Speculative Positioning in Yen
Source: Bloomberg.
Speculators began unwinding their yen positions. Hedge funds benefited the most, while asset managers were left on the losing side. The latter had bet on policy divergence between the Fed and the Bank of Japan. However, if that divergence unfolds more slowly than expected, these financial managers could find themselves at a disadvantage.
One of the drivers in the rapid USDJPY rally was a sudden shift in sentiment. The U.S. government shutdown had briefly boosted demand for the yen as a safe haven, but Takaichi’s victory flipped the narrative. Investors were reminded of their distrust toward the U.S. dollar, given Donald Trump’s attempts to influence Fed policy. A move toward fiscal dominance in Japan — where government policy undermines the central bank’s independence — could have serious consequences for the yen.
Still, the reality may not be as bad as it appears. Under Shinzo Abe, Japan struggled with deflation, but consumer prices have now been rising at an annual pace of over 2% for more than three consecutive years. Takaichi will need to show flexibility, as the Liberal Democratic Party no longer holds an absolute majority — cooperation and compromise are inevitable.
The new leader has already begun softening her earlier stances. Previously, Takaichi had declared that Japan would seek to revise its trade deal with the U.S. if it conflicted with national interests. Later, she toned down her rhetoric, saying Japan would “express its position” instead. She has also refrained from repeating her earlier remark that the BoJ should not raise the overnight rate.
Yen Reversal Risk and Positioning Dynamics
Source: Bloomberg.
Weekly Trading Plan for USDJPY
The markets have overreacted to Sanae Takaichi’s victory. The Bank of Japan remains independent and is likely to continue its monetary tightening cycle. Although reversal risk metrics suggest a continuation of the USDJPY rally, it’s essential to remember that the old “Three Arrows” policy no longer applies to today’s Japan, which is grappling with persistent inflation. Failure of the pair to hold above 149.9 will be a signal to sell.
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
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