Supply-demand balance curbs the 'Takaichi yen weakness'… "A historic plunge in the yen is now a more distant prospect"

Momentum for a renewed weakening of the yen is fading. Despite speculative yen selling triggered by Sanae Takaichi’s administration’s proactive fiscal stance—at times pushing the currency close to the early threshold of a “historic yen slump” near 160 yen per dollar—the rate ultimately failed to break out of the 150–160 yen range. Analysts say this is because real-economy yen selling has declined.

According to the Nikkei on the 15th, Japan’s foreign-exchange market had expected yen weakness to accelerate after the ruling Liberal Democratic Party, led by Prime Minister Takaichi, won a historic landslide in the Oct. 8 general election. The result was interpreted as an endorsement of the Takaichi administration’s proactive fiscal policy.

After the election, however, the FX market reacted in the opposite direction. Far from approaching 160 yen per dollar, the yen at one point strengthened into the 152-per-dollar range. The Nikkei noted that “a replay of the historic yen slump has, for now, become more distant,” adding that “a sober look at the exchange-rate trajectory shows that, contrary to market expectations, the ‘Takaichi yen weakness’ since last autumn has remained within the 150–160 yen per dollar range even now.”

The yen’s value plunged from the 115-per-dollar range in early 2022 to a historic level that at one point exceeded 160 per dollar. In that process, speculative yen selling by hedge funds and others was compounded by real-economy yen selling by companies, accelerating the currency’s decline. The trade and services balance—which reflects such real-demand flows—shows that the deficit widened sharply in 2022.

But the situation has changed. As yen weakness boosted Japanese exporters’ profitability and gradually improved export competitiveness—along with an expansion in inbound tourism (foreign visitors to Japan)—the trade and services deficit has narrowed significantly. According to the 2025 balance of payments released by the Ministry of Finance on the 9th, the deficit came to about 4.24 trillion yen, down to roughly one-fifth of the 21 trillion yen level seen in 2022. While real-demand yen selling had a major impact in accelerating yen weakness in 2022, the assessment now is that supply-demand imbalances have largely been resolved, limiting the impact on the exchange rate.

Analysts say that unless real-demand yen selling expands, even if hedge funds attempt to sell the yen by citing the Takaichi administration’s proactive fiscal stance as a reason to bet against Japan, the yen’s downward momentum can be checked by verbal intervention alone from the Japanese government and the Bank of Japan. The Nikkei projected that “unless new catalysts emerge that lead to yen selling and dollar buying, a historic yen slump beyond 160 per dollar will be difficult to reproduce.”

Market attention is now turning to how monetary policy will be run in both the US and Japan. Key questions include whether Kevin Warsh, nominated as the next chair of the US central bank (Fed), will lean toward easing or tightening, and how the Takaichi administration’s renewed mandate from the general election will affect the Bank of Japan’s stance on raising policy rates. The Nikkei said that “as the real-demand bias is being resolved, conditions are again falling into place for the US-Japan interest-rate differential to come back into focus.”

Tokyo=Correspondent Kim Il-gyu black0419@hankyung.com