11.02.202600:33 Forex Analysis & Reviews: USD/JPY: Why Is the Yen Strengthening?

The USD/JPY pair has been declining for the second consecutive day, not just because of the overall weakening of the American currency. The yen is appreciating across the market, as indicated by the cross pairs involving the Japanese yen (GBP/JPY, EUR/JPY, AUD/JPY).

At first glance, the yen's behavior seems illogical. Following the early elections held just recently, the incumbent Prime Minister Sanae Takaichi has solidified her power by obtaining a constitutional majority in the lower house of parliament. The ruling Liberal Democratic Party of Japan secured 316 seats in the 465-seat parliament, thereby gaining a mandate to conduct reforms and other decisions, including economic ones.

As is known, Takaichi is a proponent of what is known as "Abenomics," which is based on stimulating the economy (through aggressive government spending), easing monetary policy, and implementing structural reforms. Therefore, the landslide victory of the LDP is inherently a negative signal for the Japanese currency. During her campaign, Takaichi promised to temporarily abolish the 8% consumption tax on food and beverages. This measure would significantly impact the treasury: preliminary estimates suggest that the budget would lose about 5 trillion yen annually (approximately $32 billion).

Moreover, the abolition of the consumption tax is not the only component of "Sana-economics." This includes lowering fuel prices, subsidies for electricity and gas bills, and increasing funding for hospitals, clinics, and other social institutions, among other things.

A logical question arises: at whose expense is this generous "banquet"? Most analysts believe that such enormous additional expenses will necessitate the issuance of new government bonds, with all the consequences that entail. An expansion of borrowing means an increase in the supply of debt securities, resulting in pressure on their yields. For the market to "digest" these new issuances, the Bank of Japan will have to abandon any further normalization of monetary policy. In other words, they will take a wait-and-see position indefinitely.

Additionally, confidence in fiscal sustainability has deteriorated, as Japan already faces a record level of national debt (the debt-to-GDP ratio has reached 260%).

This is why the yen initially reacted negatively to the results of the early parliamentary elections—at the start of the Asian session on Monday, the USD/JPY pair hit a near three-week high at 157.67.

However, subsequent comments from Takaichi calmed the markets and allowed USD/JPY sellers to take the initiative, especially against a weakening greenback.

According to the Japanese government head, tax cuts will be carried out "at the expense of alternative sources of financing," the use of which will not lead to an additional increase in the national debt.

What does this involve? The specifics remain vague, as there is no concrete information yet. The phrasing regarding alternative sources of financing is still mostly declarative. According to Takaichi, she "will break her head" to quickly achieve a two-year moratorium on the consumption tax. However, as the Prime Minister noted, the draft of the tax abolition will not be presented until at least summer, tentatively in June.

Such reassuring signals have supported the Japanese currency, but in my opinion, the yen will not be able to "rest on its laurels" for long.

Firstly, Takaichi will inevitably implement an accommodative fiscal policy—now without regard to the opinions of coalition partners (since the LDP now has a majority).

Secondly, the abolition of the 8% tax on food is, de facto, a structural minus to budget revenues, and the term "alternative sources" lacks clear substantive content at this time. Japanese authorities may resort to off-budget mechanisms (utilizing special accounts, quasi-government funds, and programs involving state banks), but the resulting obligations will not go away. Future obligations will remain, and the risks will ultimately fall on the state and, indirectly, on the BoJ.

However, all of this, as they say, is "for later," while today the market is reacting to the reassuring rhetoric of Takaichi, which is strengthening the yen across the board. In its pair with the dollar, the downward momentum is intensified by the overall weakening of the American currency. The DXY is declining amid weak labor market data (last week's ADP, JOLTS, and Unemployment Claims reports came in red) and rising dovish expectations for the Fed's future actions. This combination allows sellers of USD/JPY to explore new price horizons as they approach the boundaries of the 153 figure.

If the official US labor market data (to be published on Wednesday) does not save the American currency, the USD/JPY pair will continue its downward movement—not only because of the weakness of the greenback but also because of the yen's strengthening. The nearest support level is located at 152.50, which corresponds to the lower line of the Bollinger Bands indicator on the daily chart.