USD/JPY Reacts to Political News: Budget Line Will Be Soft

USD/JPY is down to 156.73 on Monday. The Japanese yen had earlier dropped to its lowest levels in almost two weeks after a landslide victory for Japan's ruling Liberal Democratic Party in early elections to the lower house of parliament. The coalition is led by Prime Minister Sanae Takaichi. However, demand for the yen returned shortly after.

Takaichi's coalition won 352 of 465 seats in the House of Representatives, according to NHK. At the same time, the Liberal Democratic Party of Japan itself secured a majority of 316 seats. The vote's outcome provided the prime minister with a clear mandate to implement an expansive fiscal policy.

Markets regarded the result as a signal in favour of a softer budget line and possible tax breaks. This increased pressure on the yen and Japanese government bonds amid fears of a rise in the debt burden. At the same time, the results supported expectations of more favourable dynamics for the stock market.

A more conservative domestic agenda is now expected to advance, including stricter immigration policies and land ownership rules. All this adds uncertainty to the assessment of medium-term consequences for the economy and financial markets.

Technical Analysis

On the H4 chart for USD/JPY, following a sharp decline at the end of January, a local bottom formed in the 152.00-152.20 zone, from which the pair began to recover. This impulsive growth was accompanied by movement along the upper border of the Bollinger Bands. The price is now trading below recent highs and consolidating in the 155.80-157.70 range. Volatility has decreased, and the structure remains corrective. However, momentum weakened, and the market has entered a pause phase under resistance.

The H1 chart shows the development of lateral dynamics after growth, with the price hovering around the Bollinger Bands' midline, and no new momentum forming. Selling pressure quickly cancelled attempts to move higher to 157.40-157.70, while support holds in the 155.50-155.80 region. The near-term trajectory appears neutral, with a balance between correction and attempts to continue the recovery.

Conclusion

In summary, USD/JPY is undergoing a corrective pullback as the market digests the political implications of Japan's election outcome. While the landslide victory initially weakened the yen on expectations of expansive fiscal policy, a technical pause has followed. The pair is now consolidating, caught between the fundamental pressure from anticipated higher Japanese debt (bearish for JPY) and technical resistance. The near-term trajectory will depend on whether this consolidation leads to a continuation of the recovery or a deeper correction, with clarity on the new government's fiscal measures serving as the next major catalyst.

By RoboForex Analytical Department

Disclaimer: Any forecasts contained herein are based on the author's particular opinion. This analysis may not be treated as trading advice. RoboForex bears no responsibility for trading results based on trading recommendations and reviews contained herein.