The storm surrounding the change of LDP leadership is now history. The Bank of Japan’s reluctance to raise rates while the Fed is cutting them doesn’t help USDJPY, but it doesn’t harm it either. For now, all eyes remain on the trade war. Let’s discuss it and make a trading plan.
The article covers the following subjects:
Major Takeaways
- “Takaichi trade” is on pause.
- The Bank of Japan is in no rush to hike rates.
- The yen is forced to react to the trade war.
- A drop below 150 is a signal to sell USDJPY.
Weekly Fundamental Forecast for Yen
Trump alone can’t keep the market going. While investors in the US actively engage in the TACO trade, in Japan, the focus has been on the Takaichi trade. The new leader of the Liberal Democratic Party plans to expand fiscal stimulus and may hinder the Bank of Japan’s efforts to tighten monetary policy. Her stance encourages markets to buy stocks, sell bonds, and sell the yen. However, this strategy has its pitfalls, as shown by USDJPY‘s recent moves.
Power never stays unclaimed for long. When the LDP’s long-time partner Komeito refused to form a coalition, the Japan Innovation Party, known as Ishin, stepped in. Together with the LDP, they hold 231 seats in parliament, lacking just two seats for a majority. However, divisions within the opposition make Sanae Takaichi confident she has the prime minister’s seat in her pocket.
Reaction of Japanese Stocks to New Prime Ministers
Source: Bloomberg.
Still, buying stocks and selling bonds and yen purely on expectations is unwise. Markets always need time to see the gap between words and actions. Investors are waiting for concrete steps from the new government, which leads to consolidation. That was the case when Junichiro Koizumi pushed reforms in 2005, and again when Shinzo Abe launched his economic revival measures in 2012.
A pause in the Takaichi trade shifts attention back to monetary policy and global risk sentiment. When worries about another banking crisis, like in 2023, came back after weak reports from US regional banks, USDJPY dropped sharply. Bloomberg noted that two and a half years ago, the pair dropped 800 pips in a similar situation. If history repeated itself, it could fall to around 146.
US Regional Bank ETF Dynamics
Source: Bloomberg.
As soon as those fears faded and the S&P 500 surged, the yen retreated. It continues to respond sensitively to monetary policy signals. At the IMF meeting, Kazuo Ueda didn’t rule out a rate hike in October but offered no clear guidance. Futures markets currently price in only a 23% chance of tightening at the next BoJ meeting, and 62% for December.
The Fed, on the other hand, is expected to cut rates in October despite the lack of data caused by the shutdown and think twice before acting again in December. These opposing central bank stances give neither side a short-term advantage in USDJPY. The pair is therefore driven mainly by the US–China trade conflict. Any de-escalation of that conflict favors the bulls.
Weekly Trading Plan for USDJPY
In the coming days, USDJPY is expected to move in both directions, likely consolidating over time. The 150 level is the key threshold. If the bulls fail to hold above it, it 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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