Japan's Ex-FX Chief Sees Yen Firming as Takaichi's Stance Clears

Japan’s former foreign exchange market chief has signaled that the yen is likely to strengthen as investors gain a clearer understanding of Prime Minister Sanae Takaichi’s fiscal stance. Tatsuo Yamasaki, former vice finance minister for international affairs, said that investors are increasingly recognizing Takaichi’s "responsible" fiscal approach, which could lead to a more stable yen.

The yen has shown signs of reversing recent trends following Takaichi’s landslide victory in the snap election, according to Yamasaki. The former yen chief praised the efforts of current Finance Minister Satsuki Katayama and FX chief Atsushi Mimura to stabilize the currency market.

Yamasaki’s comments came after the yen and long-term bond yields began to shift from their previous trajectories. The yen strengthened from around ¥159 per dollar to ¥152, amid speculation about possible coordinated action between Tokyo and Washington.

Why Did This Happen?

Yamasaki ruled out a high probability of the US helping Japan with joint currency intervention. He noted that Washington has been advocating against unilateral currency manipulation, making joint action between the US and Japan unlikely.

The yen has been under pressure due to market speculation that Takaichi’s government would pursue expansive fiscal policies. However, Yamasaki argued that Takaichi’s fiscal approach is not necessarily expansionary. He pointed to the initial budget for the fiscal year starting in April, which shows an increase in general spending of only about ¥2 trillion while tax revenue is rising by nearly ¥6 trillion.

What Are Analysts Watching Next?

Market watchers are focusing on how Takaichi’s government will fund its proposed tax cuts, including the temporary suspension of the 8% food sales tax. Some analysts have suggested that Takaichi might consider tapping into Japan’s $1.4 trillion in foreign currency reserves, which include a significant portion held in U.S. Treasuries.

Yamasaki emphasized that intervention would aim to dampen volatility and squeeze speculative positions out of the market, rather than stop the yen from crossing a specific threshold like 160 per dollar. He noted that such measures are about preventing excessive speculative trading, not about achieving a specific exchange rate.

What’s the Outlook for the Yen?

Yamasaki said that the yen appears undervalued compared to fundamentals and that yield volatility will settle down as the market adapts to Takaichi’s policy direction. He also highlighted that the Finance Ministry has done a good job keeping a lid on recent market movements.

The yen’s performance will depend on how effectively the government can communicate its fiscal plans and reassure investors that it is not overreaching its capacity to fund new initiatives. Analysts are also watching how the yen will respond to global economic developments, including U.S. interest rate decisions and inflation expectations in other major economies.

The yen weakened to its weakest level in two weeks after Takaichi won the election, with traders expecting additional fiscal stimulus. However, as investors gain more clarity about the government’s fiscal approach, Yamasaki said it wouldn’t be strange to see the yen strengthen further.

Japan’s currency market is now closely watching for signs that the government will continue to prioritize fiscal responsibility while pursuing growth initiatives that align with global economic trends. The yen’s next move could provide early clues about the effectiveness of Takaichi’s economic strategy and its impact on investor sentiment.