LIVE MARKETS-The end of the road for yen weakness

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THE END OF THE ROAD FOR YEN WEAKNESS

The yen JPY=EBS is a touch stronger on Wednesday, but only after sliding to its weakest in 18 months earlier in the day, as markets worry that a new election could ease political constraints on current PM Takaichi and pave the way for more fiscal stimulus.

"...investors are positioning for higher bond yields, rising equity prices and a weaker yen," says Udith Sikand, analyst at Gavekal Research.

Looser fiscal policy looks likely if Takaichi manages to strengthen her hand, but monetary policymakers look set to continue raising rates, albeit in a gradual manner.

The BOJ raised borrowing costs in December without too much pushback from the government or adverse market reaction.

"The BOJ has since indicated that it plans more tightening, spurred in part by concerns about the weak yen and its impact on the inflation outlook," Sikand adds.

"Hence, the market's bet on a renewed Takaichi debasement trade seems premature, if not misplaced."

Citi also believes the yen will strengthen from here, but it might require falling Japanese stocks to kickstart the trade.

"Monetary easing by the Fed has contributed to the strength of U.S. equities, and in turn to gains by Japanese equities," writes Citi currency strategist Osamu Takashima.

"In the resulting risk-on environment the weakness of the JPY has continued for a longer period than we had expected."

But, with interest rate differentials between the U.S. and Japan narrowing as Japanese bond yields push to multi-year - or even record - highs, Citi thinks dollar-yen could be close to its peak.

"We believe that from a long-term perspective around ¥155/$ should be the ceiling for the USDJPY, while we look for the pair to correct to around ¥145/$ in 2026 H1 and then to around ¥140/$ in H2," Takashima says.

(Samuel Indyk)

EARLIER ON LIVE MARKETS

STOXX, FTSE HITS NEW PEAKS CLICK HERE

BEFORE THE BELL: EUROPEAN FUTURES FLAT, METALS SHINE CLICK HERE

TURBOCHARGED 'TAKAICHI TRADE' PUTS MARKETS ON YEN WATCH CLICK HERE