USD/JPY steady as Japan’s politics shake markets, risk-off tone prevails

Global markets are starting the day on the defensive as traders trim exposure ahead of key political events. U.S. futures point to the S&P 500 opening 1.5% lower, mirroring Europe’s decline, while the dollar stays soft overall. Yet USD/JPY remains firm—acting as a stabilizer amid turbulence in Japanese markets.

Japan steals the spotlight

Japanese assets are under pressure after Prime Minister Sanae Takaichi called a snap election for February 8 and announced a two-year suspension of the 8% food tax—a populist move aimed at boosting the Liberal Democratic Party’s (LDP) standing.

The bond market didn’t take it well. 30-year JGB yields surged 25 basis points, one of the sharpest moves in years, sending ripples through global bond markets. Inflation expectations have jumped to 1.9%, suggesting Japan’s fiscal stimulus is reviving price pressures.

With the Bank of Japan sticking to a slow tightening path, real rates are falling, weakening the yen. If long-end JGB yields continue to rise, USD/JPY could drift toward 159–160, close to potential intervention levels. But since the yen’s weakness is now policy-driven, any government intervention may have limited impact.

Global sentiment: Risk-off but orderly

Beyond Japan, markets are cautious rather than panicked. Traders are waiting for Trump’s Davos remarks and any signs of U.S.-Europe trade escalation. Key questions include:

• Will U.S. tariffs on Europe start on February 1?
• Will Europe retaliate with €93bn in tariffs?

This is risk management, not crisis response.

“Weaponisation of capital”: More talk than threat

Europe’s hint at pulling money from U.S. assets sounds bold but lacks bite. Most of the U.S. external deficit reflects valuation gains, not borrowing, and European investors remain in U.S. markets for returns, not politics. Unless U.S. performance dips sharply, capital flight looks unlikely.

USD/JPY and the Dollar: Controlled, not collapsing

Strategically, the dollar is on a slow weakening path, but the yen story is dominating headlines. The JGB sell-off and BoJ’s caution are keeping USD/JPY supported even as broader dollar sentiment softens.

Today’s ADP jobs report should show modest hiring but no major deterioration, keeping the U.S. economy’s “soft but stable” narrative intact.

USD/JPY is consolidating within a clear descending channel after peaking near 159.50, currently trading around 157.70. The short-term bias remains mildly bearish as price holds below the channel’s upper boundary near 158.80–159.00, with 157.00–156.70 acting as key support. A break below that zone could extend the correction toward 156.00, while a push above 159.00 would reopen the path to 159.50–160.00, where intervention risks rise. Overall, this looks like a controlled pullback within a broader uptrend, with yield spreads and Japan’s policy stance continuing to anchor direction.

Trading view

This is risk trimming, not regime change.

• Politics are driving volatility.
• Japan’s fiscal pivot is pressuring the yen.
• Dollar downside is controlled.
• Equity weakness is sentiment-led, not fundamental.

Unless trade tensions hit earnings or U.S. growth falters, this remains market noise—not a macro turning point.

Bottom line

Markets are defensive but not disorderly. Japan’s fiscal gamble is rippling through global bonds and keeping USD/JPY elevated, while the dollar overall drifts lower in a measured fashion.

In short: Risk is being managed, not dumped—and as long as Japan’s policy stays loose and the BoJ stays patient, the yen’s path of least resistance remains weaker.