Yen’s Collapse Underscores Market’s Loss of Faith in BoJ Tightening

Key Takeaways:

*The probability of a near-term BoJ rate hike plunged from around 70% to 40%, prompting a rapid unwind of yen-long positions and fueling broad FX volatility.

*“Takaichi Trade” emerges: Investors are rotating into a powerful three-way position that long Japanese equities, short government bonds, and short the yen as stimulus expectations surge.

*JGB yields spike: Long-dated Japanese bonds sold off sharply on fears of increased fiscal spending and debt issuance, sending 30- and 40-year yields to multi-year highs.

Market Summary:

The Japanese yen suffered one of its steepest sell-offs in years, collapsing past the 150 level against the dollar as a seismic political shift rattled market expectations for Bank of Japan policy. Sanae Takaichi’s victory in the ruling party leadership race has reignited the spirit of “Abenomics,” emphasizing aggressive fiscal spending and continued monetary accommodation. Her ascent immediately undermined bets on near-term policy normalization, triggering a broad exodus from the yen.

Prior to the election, markets were positioned for gradual BoJ tightening under a more centrist successor. Instead, Takaichi’s pro-stimulus platform caused the probability of a rate hike this month to tumble from nearly 70% to just above 40%. Investors quickly unwound yen-long positions, propelling USD/JPY and other yen crosses to multi-year highs. The yen’s weakness was amplified by a surge in global carry trade demand, with high-yielding currencies such as the AUD and CAD outperforming sharply.

Japan’s bond market echoed the turmoil. Long-dated Japanese Government Bonds (JGBs) sold off aggressively as traders priced in the likelihood of expanded fiscal stimulus and additional debt issuance. Yields on 30-year and 40-year JGBs spiked to multi-year highs, while equity markets soared, with the Nikkei 225 hitting a record high amid expectations of renewed liquidity support. This powerful rotation—long equities, short bonds, short yen—has come to define what traders are calling the “Takaichi Trade.”

For now, the yen’s safe-haven appeal appears to have evaporated. With the BoJ likely to stay dovish for longer, and Japan entering a fresh cycle of fiscal expansion, the currency risks further depreciation. Unless there is a material policy shift or coordinated intervention, USD/JPY’s upward trajectory may persist as global investors reallocate toward risk and yield.

Technical Analysis 

USDJPY, H4: 

USD/JPY has staged a strong breakout from its prior descending channel, surging past the 150.00 psychological barrier and testing resistance near 150.40. The pair has shifted firmly into a bullish structure, establishing a series of higher lows since late September, with prices holding above the short-term moving averages (20- and 50-period SMAs). The breakout suggests renewed upside momentum, though the pair is now trading in an overextended zone after a steep vertical climb.

The RSI has risen to 70, signaling overbought conditions and hinting at potential consolidation, while the MACD remains sharply bullish with widening histogram bars reflecting strong but possibly unsustainable momentum.

In the near term, a sustained move above 150.40 could open the path toward 151.20 and 152.00, levels last seen during the 2022 intervention period. Conversely, if profit-taking emerges, support is likely at 150.00 and deeper at 148.75, where bullish buyers may reenter to defend the trend.

Resistance level: 151.20, 153.40

Support level: 150.00, 148.75