When Takaichi won the Liberal Democratic Party leadership election in early October, the yen immediately tumbled, with USD/JPY surging past the psychologically important 150 level and reaching as high as 153 during the initial market reaction. As of late October, the pair hovers around 152, reflecting persistent weakness in the Japanese currency.

JPY/USD price performance over the past 5 years.

Why does this matter for the yen? Currency markets anticipated that Takaichi's preference for stimulus could keep Japanese interest rates lower for longer, widening the gap between US and Japanese borrowing costs. This interest rate differential is the primary driver of yen weakness. When US 10-year Treasuries yield around 4.1% compared to Japan's 10-year bonds at roughly 1.6%, capital flows toward higher-yielding dollar assets, weakening the yen.

Investments in strategic sectors like semiconductors and artificial intelligence

Notably absent are large-scale cash transfers to households, which proved unpopular in previous elections. This targeted approach suggests fiscal policy will support growth without triggering runaway inflation or dramatically worsening Japan's debt situation (already at 240% of GDP).

Will the Bank of Japan continue raising interest rates?

Despite political uncertainty, most analysts believe the BOJ's normalization path remains intact. The central bank currently maintains its policy rate at 0.5%, the highest since 2008, after raising rates from negative territory earlier this year. Market expectations suggest a 25-basis point hike is likely by early 2026, with many economists projecting rates to reach 0.75% by March.

Japan's "shunto" spring wage negotiations delivered average increases of 5.25% in 2025—the highest in 34 years—and labor unions are demanding at least 5% raises again for 2026. This virtuous cycle of wages feeding into consumption and prices is exactly what the BOJ has sought for decades. With wage growth running at 5% and the policy rate at just 0.5%, monetary conditions remain accommodative by any measure.

Limited political interference: Despite concerns, Takaichi has indicated she will not revise the 2013 government-BOJ accord that established the inflation target framework. Her finance minister, Satsuki Katayama, while described as favoring "expansionary fiscal policy," is fundamentally aligned with the Ministry of Finance and does not favor significant interest rate suppression.

The yen's outlook over the coming months hinges on several key factors

With the BOJ expected to pause at its October meeting and US-Japan yield differentials remaining wide, the path of least resistance for USD/JPY appears to be sideways to higher, potentially testing the 155 level if risk sentiment remains positive. As the BOJ continues its normalization path—likely hiking to 0.75% by March 2026 and potentially reaching 1% by mid-2026—the yen should find gradual support as interest rate differentials narrow. Most analysts project rates reaching the lower end of the neutral range (1-1.25%) by year-end 2026, which should help stabilize the currency.

The coalition arrangement and Takaichi's pragmatic cabinet appointments (including fiscal conservatives like former Finance Minister Suzuki as LDP Secretary General) suggest spending will remain targeted rather than excessive. This should limit concerns about fiscal dominance undermining the yen.

Downside risks

If Takaichi's government proves more fiscally aggressive than expected, or if the BOJ delays rate hikes significantly beyond market expectations, the yen could test weaker levels. Additionally, intensified US-China trade tensions or a significant US economic slowdown could create unpredictable volatility.

Conclusion

As the BOJ continues its cautious march toward neutral rates and Takaichi's government implements targeted fiscal support, Japan's economy is finding its footing in a new era. For currency markets, this means the yen's story is far from over: it's just entering a new chapter where political pragmatism, monetary normalization, and economic resilience will ultimately define the exchange rate trajectory