USD/JPY heads for weekly gains ahead of Japan elections and USD rebound

USD/JPY Analysis

Japan's vote will take place over the weekend after Prime Minister Takaichi announced snap polls last month, aiming to consolidate her power amid favourable public support. The vote has raised concerns over the country's fiscal position, as a victory could enable the Prime Minister to continue expansive policies to counter economic headwinds. PM Takaichi has also announced reductions to the consumption tax for middle- and low-income earners for two years ^[1], which could create a gap in public finances, coming shortly after a ¥21.3 trillion stimulus package. ^[2]

This increase in spending could complicate the central bank's tightening path and exacerbates global debt concerns, undermining confidence in the yen. The currency has lost ground since PM Takaichi assumed power, as she appears to favour a weaker yen. A few days ago she highlighted opportunities arising from such weakness, although she later walked back her remarks.

Meanwhile, the USDOLLAR has staged a recovery in recent days after President Trump nominated former governor Kevin Warsh to succeed Fed Chair Powell ^[3]. This was seen as a status quo and less dovish pick than feared, alleviating concerns over central bank independence and potentially limiting the scope for rate cuts.

Rising fiscal concerns weighing on the yen, coupled with greenback resilience, have pushed USD/JPY back above the EMA200. This reinforces upside potential and positions the pair for new multi-year highs. However, the Relative Strength Index (RSI) points to overbought conditions that could slow the advance and lead to a return below the EMA200, with fundamental challenges also looming.

The yen's decline and heightened volatility raise the risk of intervention to support the currency. Japanese officials, including the Finance Minister ^[4], have pointed to such FX action on various occasions recently. Furthermore, while the Bank of Japan has adopted a gradual approach to rate increases, it maintained a tightening bias last month in response to persistent price pressures and strong wage growth. Officials also upgraded the CPI and GDP forecasts for fiscal 2026, strengthening the case for further rate hikes. ^[5]

By contrast, markets continue to expect rate cuts by the Federal Reserve, sustaining unfavourable monetary policy dynamics for the greenback. Moreover, dollar weakness could resume over the medium term, as it faces the same structural debasement trends that erode confidence in major currencies.