USD/JPY staged a knee-jerk rise following Sanae Takaichi’s victory in Japan’s Liberal Democratic Party (LDP) elections on October 4. She is expected to be confirmed as Japan’s first female prime minister in a Diet vote on October 15. Despite the LDP-Komeito coalition losing its majority in both houses, it remains the largest bloc in the Diet amid a fragmented opposition. Markets will likely price in Takaichi’s pro-growth agenda, which implies an expansionary fiscal policy and a slower pace of monetary policy normalization by the Bank of Japan.
However, USD/JPY’s gains may be capped around 149-151. We refrain from drawing superficial parallels between Takaichi’s fiscal agenda and UK’s Liz Truss’s mini budget crisis in 2022. Despite her pivot towards Abenomics-style stimulus, Takaichi could face pushback from rival LDP factions and opposition parties. BOJ Governor Kazuo Ueda has reiterated that further rate hikes depend on domestic demand-driven factors – particularly real wage gains and sustained inflation expectations – rather than fiscal expansion and temporary price pressures.
JPY bears also need to watch out for a softer USD tone. There is no indication when the US government will reopen after shutting down on October 1. The Fed and markets will be flying blind without data from the Bureau of Labor Statistics, the agency responsible for releasing last Friday’s US monthly jobs data, next week’s CPI, and weekly jobless claims.
The shutdown risks being prolonged as both Republicans and Democrats focus on shifting blame rather than finding compromise, each eyeing political advantage ahead of next year’s mid-term elections. Trump has raised the stakes by threatening permanent layoffs, which would deny furloughed workers back pay and turn a temporary disruption into a lasting labour market shock. Markets could respond by pricing in more Fed cuts if they see an extended shutdown tilting the Fed from its data-dependent toward a risk-management stance.
Attention will also turn to US-China trade talks as China returns from its Golden Week holiday. US President Donald Trump has floated the idea of meeting Chinese President Xi Jinping to sign a “trade deal” – more likely a framework with caveats – before the current trade truce expires on November 10. Any agreement will likely be unveiled at the APEC Summit in South Korea (October 31-November 1) than at the ASEAN Summit in Malaysia (October 26-28).
Washington and Beijing want to avoid escalation without appearing bending under pressure to their domestic audience. Trump could frame getting China to buy US soybeans and corn as a win for American farmers. Xi will portray any tariff rollbacks as proof that China defended its sovereignty rather than yielding to one-sided pressure from Washington.
The Reserve Bank of New Zealand’s (RBNZ) meeting on October 8 could offer a tactical opportunity to turn constructive on the NZD. The OIS market appears over-priced for easing, with the official cash rate (OCR) to decline by a total 75 bps 2.25% this year, split between a 50-bps cut on October 8 and a 25-bps reduction on November 26. Acting Governor Christian Hawkesby has limited his projection for the OCR to 2.50%, the floor of the neutral rate range of 2.5-3.5%. Incoming Governor Anna Breman, who assumes office on December 1, has pledged a laser focus on low and stable inflation. With CPI inflation rising to 2.7% YoY in 2Q25 from 2.2% in 4Q24, within the upper half of the RBNZ’s 1-3% inflation target range. NZD/USD could extend its recovery towards 0.5960 if it breaks above its resistance at 0.5850.
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