Yen Slides as Political Uncertainty, Regional Tensions Weigh on Markets

The Japanese yen weakened sharply against the US dollar on Tuesday, falling about 0.6% to its lowest level in roughly a year and a half, as investors reacted to rising political uncertainty in Tokyo.


The decline followed reports suggesting that Japan’s prime minister may dissolve the lower house of parliament at the start of the new legislative session later this month, paving the way for early elections in February. The prospect of an early vote unsettled markets, which fear that a strong victory for the ruling party could reinforce loose fiscal policies and prolong an accommodative economic stance.


Such expectations have raised concerns about higher long-term inflation pressures, a scenario that typically undermines the yen by eroding its purchasing power and reducing its appeal to investors seeking stability.


Rising Friction with China Adds Pressure

The yen has also come under additional strain from escalating tensions between Japan and China. Beijing recently announced new restrictions on exports to Japan that could have military applications, a move widely seen as a response to comments from Japanese leadership regarding a potential conflict over Taiwan.


These measures have heightened worries about supply chain disruptions and possible knock-on effects for Japan’s export-driven economy, further dampening confidence in the currency.

Policy Outlook Keeps Yen on the Defensive

Market sentiment continues to reflect the belief that Japan’s central bank is unlikely to tighten monetary policy in the near term. Investors widely expect interest rates to remain unchanged at the upcoming policy meeting later this month, reinforcing the view that ultra-loose monetary conditions will persist.


Together, political uncertainty, regional geopolitical risks, and expectations of continued easy policy have combined to push the yen lower, keeping it vulnerable to further weakness in the near term.