The Japanese Yen (JPY) is up a modest 0.2% vs. the US Dollar (USD), tentatively attempting to extend its recent recovery against the USD while trading defensively against all of its G10 peers, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Election risk weighs on Yen sentiment

"The focus for Japan is on the upcoming election, scheduled for February 8, with market participants assessing the implications of PM Takaichi’s prospects and the potential for significantly looser fiscal policy. The selloff in JGB’s is notable, with 10Y, 20Y, and 30Y yields up significantly on the day, surging 9, 21, and 27bpts, respectively."

"The selloff is also intensifying the focus on Friday’s BoJ decision, where a widely anticipated hold is likely to be paired with a decidedly hawkish tone as policymakers will seek to push back on market participants expectations for a less independent, cooperative central bank."

"Intervention risk remains elevated, with recent verbal interventions from the MoF corresponding to the 158 and 159 levels in USD/JPY. Technicals are bullish but fading back toward neutral. We look to near-term weakness back toward the 50 day MA at 156.42."