During the Asian trading session this morning, USD/JPY recorded a corrective move, retreating toward the 156.5–157.0 area after a sequence of six consecutive sessions of gains.
The intraday decline reflects a degree of caution among capital flows in the Asian region, as investors tend to take short-term profits following a prolonged rally.
This price action bears the characteristics of a sentiment- and timing-driven correction rather than a clear signal of a reversal in the medium- to long-term trend.
From a broader perspective, USD/JPY continues to maintain its overall upward trend on the weekly and monthly timeframes.
Over the most recent trading week, the pair still posted gains of around 1.5–1.6%, while over the past 52 weeks, USD/JPY has risen by approximately 3.2%, trading mainly within a range of 139.88 to 159.46. This indicates that the pullback seen during the Asian session occurred while the broader trend remains intact.
The primary driver behind this morning’s correction was not stronger-than-expected U.S. or Japanese economic data, but rather market sentiment and short-term risk management behaviour. After an extended rally, a portion of investors opted to scale back long USD/JPY positions, particularly during the Asian session, a period characterized by thinner liquidity and a greater propensity for sentiment- and technically driven corrective moves.
However, looking beyond the short-term horizon, Japan’s political backdrop following the Lower House election is creating a different underlying foundation for the yen. The landslide victory of Sanae Takaichi and the Liberal Democratic Party, securing approximately 328 out of 465 seats, together with an alliance with the Japan Innovation Party that gives the ruling bloc control of more than two-thirds of the Lower House, has provided strong political backing for the new government. This outcome enables the government to pass fiscal policies with relative ease and, if necessary, override the Upper House.
This election result is not widely viewed as positive for the yen. On the contrary, expectations of an expansionary fiscal stance, including tax cuts and increased public spending, are prompting investors to reassess the risk of medium-term yen depreciation. The prospect of a widening fiscal deficit and greater liquidity supply are factors that typically do not support a sustained recovery in the currency.
This backdrop also places the Bank of Japan in a difficult balancing position. In the near term, the government has considerable room to exert pressure to maintain accommodative monetary conditions in support of growth and fiscal objectives. This weakens expectations that the BOJ will move quickly toward policy tightening, making it difficult for the yen to strengthen in a sustainable manner over the medium term, despite intermittent short-term corrections in USD/JPY.
On the other hand, the U.S. dollar does not need to be particularly strong for USD/JPY to remain at elevated levels. While market discussions around the possibility of Federal Reserve policy easing in the medium term have intensified, the U.S.–Japan interest rate differential remains wide enough to preserve the dollar’s relative attractiveness against the yen. In this context, carry trade flows may temporarily contract during corrective phases, but there are still no clear signs of a full reversal.
Therefore, in my view, the decline in USD/JPY during the Asian session this morning should be interpreted as a short-term correction following a prolonged advance, reflecting profit-taking and heightened caution in the near term. Meanwhile, the post-election political and fiscal backdrop in Japan continues to tilt toward a scenario in which the yen remains under pressure over the medium term, thereby sustaining a supportive environment for USD/JPY to trade at elevated levels, unless there is a clear shift in the BOJ’s policy stance or a decisive pivot by the Federal Reserve.
