JPY and JGB lose while Nikkei rises as Japanese election talks fuel hopes for further government stimulus. According to Kyodo News, Japanese Prime Minister Sanae Takaichi plans to announce the dissolution of the lower house of parliament on January 23, paving the way for early elections in February, BBH FX analysts report.

The risk of BOJ intervention increases with USD/JPY near 160

“Takaichi does not have to call a general election until October 2028, but he may want to use his high approval rating (almost 70%) to regain his party’s (LDP) majority in the lower house. This has raised concerns about a further loosening of Japan’s fiscal discipline, reflected in the weak performance of the yen and JGB.”

“Concerns about Japan’s fiscal profligacy are overblown. Japan’s nominal GDP growth is running at around 4% and leading indicators point to encouraging growth prospects, while the 10-year government bond yield is closer to 2%. With growth well above borrowing costs, Japan can sustain primary budget deficits without causing the debt ratio to trend upward. In such an environment, the sustainability of public finances is much less fragile than markets currently suggest.”

“Meanwhile, the risk of BOJ intervention to limit yen weakness increases as USD/JPY approaches 160.00. Japanese Finance Minister Satsuki Katayama reiterated her “concerns about a unilateral weakening of the yen,” adding that “Treasury Secretary Bessent shares these concerns.” The chairman of Japan’s largest business lobby, Keidanren, also chimed in, warning that the current weakening of the yen is somewhat excessive and a correction is needed due to a stronger yen During the last two currency interventions, the BOJ bought 9.79 trillion yen from April 26, 2024 to May 29, 2024 after the USD/JPY pair surged 5.7% in 20 days to a high 160.17, and from June 27, 2024 to July, the BOJ purchased 5.53 trillion yen. December 29, 2024 after USD/JPY rose 4.2% in 30 days to a high of 161.95.”