Political change adds pressure on the yen.

By the OFX team | 12 November 2025 | 6 minute read

2025 has been a year of two stories for the Japanese yen. Traders have seen it strengthen convincingly; and subsequently, weaken anew. Now, with Japan under new leadership, the yen’s likely path is unclear – although it is the yen bear’s feeling better as we head toward Christmas.

Yen regains its safe-haven shine.

It has been a complicated dance for the Bank of Japan (BoJ), which has historically sought to prevent the currency from rising too much, as a strong yen would hurt Japan’s export-reliant economy. A weaker yen improves the earnings outlook for export-driven Japanese companies. But in recent years, as the BoJ continued a its looser monetary policy while the Federal Reserve raised US interest rates, the yen slid to nearly three-decade lows, touching US$0.62 in June 2024. The wide US-Japan interest rate differentials forced the BoJ to support the yen in the market: the level of 150 (one US dollar buying 150 yen, or one yen buying US$0.67) was seen as the critical threshold that triggered action to support the yen.

The looseness of Japanese interest rate policy has been surprising by Western standards, with the policy interest rate spending nine years with a negative sign in front of it, before it was lifted from –0.1% to 0.1% in March 2024 – the country’s first rate hike in 17 years – and then to 0.25% in July 2024, before being lifted to its current level of 0.5% in January 2025. While inflation has exceeded its target, the central bank is still cautious, waiting for a firmer signal on wage growth to confirm a sustainable economic recovery.

Entering 2025, the yen was in a depreciating trend, having softened against the US dollar after the US elections. The yen weakness was taken as improving the earnings outlook for export-driven Japanese companies.

At its January meeting, the Bank of Japan (BoJ) Policy Board raised its policy interest rate by 25 basis points, to 0.5%. The BoJ appeared to be more confident in the inflation outlook in Japan, saying in its post-meeting decision document, that with wages continuing to rise, “underlying CPI inflation has been increasing gradually toward 2%.” But the Bank said “significant uncertainty about US economic policies and how they could impact the global economy skewed the risk to prices to the upside”, helping explain why the Policy Board considered it appropriate to raise interest rates in January¹.

The BoJ was looking at sentiment around investment², as reported in the annual survey in December, that was running near the pre-Asian financial crisis peak. Japanese businesses were responding with investment in plant and equipment that had not been as high on a sustained basis since data collection began in 2010. The appetite for investment was strong, and the January rate hike was reasonably well-flagged.

Economic data paints a mixed picture.

In March, data showed Japan’s economy grew 2.2% on an annualised basis in the fourth quarter, a slower pace than the 2.8% growth initially reported in February, on the back of weak domestic demand persists. Full-year GDP growth slowed to 0.1%, a sharp fall from the 1.5% growth seen in 2023.

But all the while, the yen was caught up in tariff turmoil and the peremptory demands from the US administration to negotiate tariffs – and the slump in the US dollar. The yen’s reputation as a safe haven was sucking money into it, as ongoing geopolitical tensions, heightened by US trade tariffs, added to the changing interest rate differential.

However, since April, fears of a trade war have eased, and at least so far, tariffs haven’t been as damaging as feared. At time of writing, the USDJPY is back to the 154.24 level, and an inverse JPYUSD of US$0.65. That has crossed the supposed 150 threshold; while versus the euro, the yen has not been at this level since the early 1990s. What does the BoJ want? What does the government want? It’s hard to say.

Back in April – with the yen buying US$0.70 – the ruling Liberal Democratic Party’s policy chief, Itsunori Onodera, chair of the party’s Policy Research Council, said Japan must strengthen the yen, such as by helping to boost the country’s industrial competitiveness, because the currency’s weakness had pushed up households’ living costs³. By blaming the weak yen for accelerating inflation – a major concern for voters – Mr Onodera could have been construed as saying that Japanese policymakers viewed the yen’s downtrend, rather than its recent rebound, as the bigger problem for the economy. However, some commentators have expressed the view that a stronger yen could have a positive impact on the domestic economy, boosting private consumption and services.

Economic data releases on hold.

The shutdown also affects the markets in the sense of what does not happen during it, too. US government agencies that normally produce economic data – such as the Labor Department¹, the Bureau of Labor Statistics and Bureau of Economic Analysis – are furloughed, and will not publish while the shutdown is in place.

This limbo has already seen the closely-watched report on jobs and unemployment, usually delivered on the first Friday of a new month, covering the previous month, missed for September on October 3. Markets have had to make do with private surveys, such as the Dow Jones consensus forecast of economists, surveys from Federal Reserve branches (some of which will publish during the shutdown, while others will not), the labour market data surveys published at job postings site Indeed², and the monthly report on private-sector jobs from ADP Research and the Stanford University Digital Economy Lab.

Haven appeal tested by political change.

But the political earthquake in October has changed the game. The surprise election win of Sanae Takaichi as the leader of Japan’s Liberal Democratic Party (LDP), and the subsequent confirmation by the Diet (Parliament) of the LDP leader as Japan’s new Prime Minister, has made Takaichi Japan’s first female PM.

Takaichi is firmly a conservative in the Japanese political spectrum, and an adherent of former PM Shinzo Abe’s ‘Abenomics,’ which formed a key part of her election campaign within the LDP.

During the campaign for the LDP leadership, Takaichi pledged “responsible aggressive fiscal policy”⁴ and vowed to pursue bold fiscal stimulus – most notably, higher spending and tax cuts – to revive the Japanese economy. This was widely viewed as reviving Abe’s 2012 economic vision of high public spending and cheap borrowing, which became known as “Abenomics” – the new PM’s policies have accordingly been dubbed “Sanaenomics.”

Takaichi is assertive on China, hawkish on defence, and evidently keen to expand Japan’s regional role. She also – as the leader of a party that cannot govern in its own right, and must eventually face voters – has to stimulate the economy and mollify voters on inflation affecting their savings. Takaichi has been critical of interest rate hikes, and has pledged to reassert the governments’ control over the central bank in setting the direction of monetary, leaving the central bank to handle its implementation. But the government and the BoJ – protective of its independent interest rate policy – have different priorities.

The government is preparing a stimulus package⁵ estimated at more than ¥13.9 trillion ($138 billion), focused on three main pillars:

Moreover, the appointment of Satsuki Katayama as Finance Minister strengthens the government’s economic credibility. A former senior official at the Ministry of Finance (MoF), Katayama is steeped in monetary and fiscal policymaking. Her past remarks suggest a preference for a stronger yen – which she once estimated to be around 120–130 per USD based on fundamentals – although she has distanced herself from those comments, as related to a very different scenario.⁶

Still, markets listen closely to what Katayama says. Early in her new role, when the BoJ kept the benchmark short-term rate unchanged at 0.5% at its October meeting, she described the decision as “extremely reasonable.”⁷ Then, she warned against the rapid depreciation of the yen (to an eight-month low), saying the government had noted the recent “very one-sided and rapid currency moves” and was “closely monitoring excessive or disorderly movements in the foreign exchange market, including those driven by speculative moves, with a high sense of urgency.” To those who have followed her career, that sounded like preparedness to intervene.

Outlook: a delicate balance for the yen

The inevitable conclusion is that the government’s policy direction will probably delay the timing of further rate hikes by the central bank of Japan. While the lower corporate borrowing costs and improving profitability for export-oriented companies continue to help the Japanese stock market, the short-to medium-term outlook for the yen looks far less favourable.

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