The Japanese Yen (JPY) continued to depreciate steadily over the last few days, reaching its weakest level against the US dollar since the beginning of the year, with USD/JPY even rising above 157. Measured against the average of all other G10 currencies, the JPY even reached its weakest level this year and is now only slightly more than 1% above last summer's level, which was the lowest since the Great Financial Crisis, Commerzbank's FX analyst Volkmar Baur notes.

Good reasons for a stronger JPY in the coming year

"If China were to consider restrictions on Japanese machinery, electrical appliances or chemical products, the Japanese economy could be more severely affected. Japanese exports to China in these three product groups alone account for more than 50% of all Japanese exports to China and more than 10% of all Japanese exports overall. And the diplomatic situation continues to appear very deadlocked. China is demanding that Takaichi completely retract her statements regarding Taiwan. This is something that Takaichi cannot do politically. The situation could therefore escalate further before it improves, which is likely to put further pressure on the JPY."

"In addition, rumours have recently emerged that the new Japanese government's fiscal package could be worth JPY 20 trillion, around twice as much as previously assumed. This led to rising yields and probably also contributed to a weaker JPY, as such a package is likely to fuel inflation again, which weighs on real interest rates. However, resistance to the government's plans appears to be slowly forming even within the ruling party. Given that Takaichi must convince not only her own party and its coalition partner, but also at least one opposition party of her plans in order to secure a majority in parliament, resistance within her own party is certainly not a good sign."

"At the same time, Takaichi met with Bank of Japan Governor Kazuo Ueda for the first time on Tuesday. Ueda made it clear that Takaichi had not given the BoJ any instructions. However, the government reiterated that it expects close coordination between the BoJ and the government. We do not expect the Japanese government to attempt to influence the Bank of Japan's short-term monetary policy, but we do see a risk that the foreign exchange market could perceive it that way if the BoJ leaves interest rates unchanged in December, contrary to our expectations. We see good reasons for a stronger JPY in the coming year."