Speculation over early elections in Japan has driven renewed Japanese Yen (JPY) underperformance, pushing USD/JPY toward the 160 level while lifting JGB yields and domestic equities. Despite elevated intervention risks, fiscal expansion fears are weakening the traditional rate-differential signal, leaving the yen outlook fragile and making fresh USD/JPY longs increasingly unattractive, OCBC's FX analysts Sim Moh Siong and Christopher Wong note.

USD/JPY nears 160 amid rising intervention risk

"Prospects of early elections in Japan triggered another bout of JPY underperformance versus G10 peers, alongside higher JGB yields and stronger equities. Intervention risk near 160 for USD/JPY remains a key watchpoint as Finance Minister Katayama and US Treasury Secretary Bessent reportedly 'shared' concerns over oneway JPY weakness."

"Japanese Prime Minister Takaichi may call snap Lower House elections for 8 or 15 February, taking advantage of strong approval ratings. An early election aimed at solidifying the LDP’s position could pave the way for larger fiscal stimulus, reinforcing fiscal sustainability concerns."

"While narrowing US‑Japan rate differentials would typically point to downside in USD/JPY, fiscal worries have weakened this transmission channel. As a result, the JPY outlook remains subdued, even as rising intervention risk makes chasing USD/JPY higher at current levels unattractive."