The Japanese Yen is under pressure! Political shifts are triggering market shorting, and the 159 level is at great risk.

The Japanese Yen trend is once again in focus. As USD/JPY approaches the 159 level, a market storm fueled by multiple factors is brewing. Political variables, central bank policy expectations, and government intervention threats are playing a “trio” in the yen market.

Political Wave in Japan Boosts Shorting Momentum

Japanese Prime Minister Sanae Takaichi recently announced the dissolution of the House of Representatives on January 23 and the early general election. This news has stirred the market. Commonwealth Bank of Australia currency strategist Carol Kong pointed out that the market has already priced in the expectation that Takaichi’s coalition may win more seats, which could open the door for further easing of fiscal policy.

“Expectations of loose fiscal policy are currently the core driver of yen weakness,” added Carol Kong. This expectation alone is enough to attract short sellers, intensifying downward pressure on the yen.

Central Bank Rate Hike Signals Become Key Variable

Despite political pressure on the Bank of Japan, the rate hike expectation has not faded. On January 23, the BOJ will announce its latest interest rate decision. The market generally expects the central bank to hold steady for now, but Governor Kazuo Ueda’s comments may reveal a timetable for a rate hike.

Former BOJ board member Masao Sakurai stated that if Takaichi’s expansionary fiscal policy raises inflation concerns, the BOJ might raise interest rates as early as April. Overnight swap data shows traders currently assign about a 40% probability to a rate hike in April. This expectation itself is weakening the yen’s attractiveness.

Critical Point of Government Intervention

Japanese Finance Minister Shunichi Suzuki and U.S. Treasury Secretary Janet Yellen have expressed concern over the yen’s unilateral weakness. Historical experience shows that when the exchange rate approaches 160, Japanese authorities have intervened multiple times.

Hiroyuki Machida, head of FX at Australia and New Zealand Banking Group, believes intervention could happen at any time, but at least until the yen depreciates to 160 per USD, authorities are unlikely to take active action. Until election results are settled and fiscal direction is clear, selling pressure on the yen is expected to continue.

Market Dilemma: Interwoven Uncertainties

The complexity of the current situation lies in the intertwining of three uncertainties: pending election results, unclear central bank policy direction, and unpredictable timing of government intervention. Lee Hardman, analyst at MUFG, pointed out that fiscal concerns combined with the slow pace of BOJ rate hikes make the yen highly vulnerable to further depreciation at the start of the year.

As the exchange rate approaches 159, the market is waiting for the next move from these three forces. Whether it is Takaichi winning the election, the central bank initiating a rate hike, or the government announcing intervention, any news could redefine the short-term direction of the yen.