USD/JPY rose by 0.8% to 148.35 due to political uncertainties. The JPY weakened after headlines that Liberal Democratic Party (LDP) Secretary-General Hiroshi Moriyama intends to resign, taking responsibility for the coalition’s loss in the Upper House election in July. The focus is, however, on Prime Minister Shigeru Ishiba, whose grip on power remains under scrutiny. While Ishiba told lawmakers he had no intention of clinging to power for its own sake, he stressed his duty to see reforms through. His remarks coincided with the LDP’s election review that attributed the losses to the party itself without directly blaming him. LDP General Council Chairman Shunichi Suzuki and policy chief Itsunori Onodera have also expressed their intention to step down. This should give Ishiba breathing space but leave room for opponents to press for an early leadership contest.

The next inflection point comes as soon as September 8, when the LDP will weigh whether to advance the leadership race. A Yomiuri poll of lawmakers and regional representatives showed 128 of 342 in favour of an early contest, just 33 opposed, and nearly half undecided. If over half submit a formal request, party rules oblige the LDP to move up the election before Ishiba’s term ends in 2027. Some lawmakers have already broken ranks: State Finance Minister Hiroaki Saito has openly declared support for an early race, while Agriculture Minister Shinjiro Koizumi is considering his stance.

Despite intraparty dissent, Ishiba retains a measure of public support. Approval ratings have rebounded across major polls to 35–39%, with many respondents now saying he should stay in office. That public cushion could buy him time, though losing Moriyama as an ally would weaken his standing. Ishiba is trying to shift the narrative to economics—promising wage growth above inflation and prioritising trade talks with the US—as he seeks to stabilise his premiership. He plans to remain in office through the autumn extraordinary Diet session. By absorbing pressure through the resignation of senior lieutenants, Ishiba is seeking to buy time with a stimulus package and supplementary budget aimed at restoring public support.

Market implications: Ishiba’s stimulus and wage-growth plans should keep alive the expectations for a Bank of Japan hike at the October or November meeting. Hence, the BOJ meeting on September 19, following the expected Fed cut in the September 17 FOMC, could re-establish the monetary policy divergence that has capped USD/JPY at 150. While Japan’s policymakers do not target a specific exchange rate level, the 150 level could be symbolic of imported inflation risks and revive bilateral friction in the context of ongoing US-Japan trade negotiations.

Fiscal shadows: GBP’s gilt pain, USD’s yield risks

GBP/USD depreciated by 1.2% to 1.3386. The yield on the 30-year Gilt rose 5.3 bps to 5.69%, its highest level since 1998. However, markets should not hastily conclude that the UK was headed for another mini-budget crisis. In 2022, the Truss government lost credibility by announcing unfunded tax cuts without oversight by the Office for Budget Responsibility amid a global inflation problem. The current pressure is driven by the structural limits – high debt and limited fiscal space – that constrain Chancellor Rachel Reeves’ ability to deliver a growth-friendly plan. Facing limited headroom, Reeves will likely face difficult choices on tax rises and spending at the Autumn Budget, due in late October or early November.

GBP’s selloff reflected not only UK fiscal jitters but also the market’s frustration with the lack of momentum in USD selling. The Fed’s rate-cutting path remains clouded by conflicting dual-mandate signals: softer labour market data argues for deeper easing, while tariffs and cost pressures caution against moving too far, too fast. This ambiguity has kept the USD better supported in the near term, depriving GBP of the tailwind it might otherwise enjoy. Still, there should be no complacency; once it becomes clearer which side of the mandate the Fed prioritises, the greenback is likely to resume its broader downward trend.

Two key events could tip the USD weaker again this Friday – expectations for another disappointing US jobs report and the start of interviews by US Treasury Secretary Scott Bessent for Fed Chair Jerome Powell’s successor. GBP bears should also be mindful that bond vigilantes are also eyeing US Treasury 30-year yields, with a break above 5% likely to deepen doubts over US debt sustainability.


Quote of the Day
“Your attitude, not your aptitude, will determine your altitude.”
     Zig Ziglar

September 3 in history
Sweden began driving on the right-hand side of the road in 1967.