I posted earlier on the impact of political developments in the yen:
Adding/recapping:
Market expectations for Japan to remain under a Liberal Democratic Party (LDP) government led by Sanae Takaichi, an advocate of Abenomics, have faded sharply, prompting traders to unwind weak-yen, long-equity, and bond positions.
The yen has strengthened notably, with USD/JPY dropping from 153.29 on Oct. 10—its highest since February—to below 152, while EUR/JPY has fallen from its record 177.92 peak. Other yen crosses have followed suit. Demand for JPY call options has surged this week as investors hedge against a potential non-LDP coalition government.
- USD/JPY is back at 151.00 as I up[date. EUR/JPY 175.50
Japanese equities have also pulled back. The Nikkei 225 slid from a record 48,597 on Oct. 9 to 46,544 earlier this week, a loss of more than 2,000 points, before stabilising slightly midweek.
In fixed income, 2-year JGB yields have eased from an Oct. 1 high of 0.965% to around 0.903%, while 10-year yields remain elevated near 1.65%, below this month’s peaks. Analysts say yields could rise again if markets price out expansionary fiscal policy and refocus on Bank of Japan tightening expectations.
The shift was triggered by Komeito’s withdrawal from its coalition with the LDP, opening the door for opposition parties to form a new government. Talks are under way among opposition blocs, minor parties, and independents, who together may command enough votes in the Lower House to form an alternative administration.
