- Yen fails to rally in risk off environment
- Japan lower house election set for Feb. 8
- Election tax pledges drive fiscal concern
- JGB curve steepens sharply
Summary
The yen’s failure to catch a bid in conditions that should ordinarily favour it speaks volumes about what is driving the price action right now. Fiscal worries linked to the upcoming election continue to overshadow everything else, keeping sentiment heavy. On top of that, carry demand is adding to the pressure, with investors still using the yen to fund positions elsewhere. With both themes working in tandem, the bias for USD/JPY remains to the upside.
Risk Proxy Role Questioned
When the Japanese yen cannot sustain a bid on a day when risk aversion is elevated and the United States dollar is getting walloped against just about everything, it really gives you a sense as to where the path of least resistance for USD/JPY lies. As covered in a more comprehensive analysis note released over the weekend, rather than rate differentials or risk appetite, the greatest influence on the yen right now appears to be domestic political factors, linked specifically to Japan’s fiscal outlook ahead of a snap election in early February.
Election Pledges Begin
Early yen strength on Monday began to unwind once Japanese Prime Minister Sanae Takaichi confirmed plans to hold a snap lower house election on 8 February. Her proposal for a two year suspension of the food consumption tax was quickly matched by opposition groups offering even larger cuts, including full abolition funded through alternative revenue streams. The detail may differ, but the direction of travel is the same, meaning that one way or another the sales tax looks set to be reduced temporarily or permanently following the election.
Curve Steepening Reflects Fiscal Concerns
Source: TradingView
The market reaction to that prospect was swift, with yields across the JGB curve punching out to fresh cycle highs with the pressure most pronounced in longer dated tenors. The move saw the 2s10s curve steepen beyond 100 basis points to new highs, perhaps explaining why USD/JPY reversed after initially trading lower given the strong relationship seen between the two variables in recent months.
Source: TradingView
It is not the curve steepening itself that is helping to push the pair higher, but rather what the move represents, reflecting firmer inflation expectations and growing concern about the sustainability of Japan’s fiscal trajectory. Added to that, ongoing carry flows into other asset classes are reinforcing the yen’s slide. Until the policy mix shifts decisively, the Bank of Japan is instructed to intervene by the government, or carry conditions deteriorate via some form of volatility event, upward pressure is likely to persist.
USD/JPY Reverses Hard, Triggering Bullish Signal
Source: TradingView
While it comes with the caveat that the signal arrived during a United States public holiday, Monday’s bullish pin from beneath the November 2025 high of 157.90 warns of near term upside risk for USD/JPY, putting a potential retest of the year to date high of 159.45 on the cards. If that level were to be broken, traders would likely eye 160.23, a level coinciding with intervention from the Bank of Japan in 2024.
If Monday’s bullish signal proves to be unreliable, downside levels of note beneath 157.90 include 157.50, where the price has now bounced from twice this year, the intersection of horizontal support and the October 2025 uptrend at 157, along with the 50-day moving average.
RSI (14) and MACD reveal dissipating upside strength on the daily timeframe, although both remain above neutral levels. The message is therefore a cautious one for bulls, rather than an outright bearish signal.
