How are political and intervention risks impacting the JPY?

Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 16th January 2026 and joining Lee to pose some questions on the financial market themes for the week ahead is Sara Mackey, an MUFG Graduate Analyst. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hello and good afternoon to everyone listening in to this Friday's podcast.

I'm here with Lee. Hi, Lee, how are you doing? I'm good.

Thanks. Thank you for joining. I'm good.

Thank you. So first thing I want to talk about Japan because a few things happened this week. We saw continued yen weakness seen with dollar yen rising close to the July 2024 high of 161.95.

Now, the yen did rebound after Finance Minister Katayama's comments. So dollar yen briefly broke below 158 after these comments, but they were quickly retraced. Now we mentioned last week that Prime Minister Takaichi is seriously considering a snap election.

And she's doing this because she's hoping to strengthen her grip on power in Japan by winning more seats for the LDP and potentially regaining an outright majority. Now this election is predicted to take place on 8th or 15th of February. And if this snap election is held, it will strengthen her power in Japan, as I mentioned, and it is likely that she will double down on loose fiscal policy.

So my question to you is how significant is this snap election risk for FX markets, especially given concerns that a stronger mandate could implement reflationist policies? Yeah, like you said, we've seen the yen weaken in response to the reports that Takaichi is considering holding a snap election. And that's, like you say, very much kind of driven by expectations that if Takaichi is able to use her own kind of positive personal approval ratings to win back more seats for the LDP, that could then strengthen her hand in terms of policy direction going forward in Japan.

And as we've seen, since she became Prime Minister, she has been pushing for looser fiscal policy. I think investors are concerned that we could see looser policy remaining in place for longer if she wins a decisive election victory. So that has encouraged further yen selling.

It's not without its risks, though, as we've seen this week. On the one hand, you have Japan showing quite clearly that they've kind of reached their limit in terms of their tolerance for further yen weakness. We do think there's a very high chance that if dollar yen keeps pushing higher above the 160 level and towards the high from back in July 2024 around the 162 level, then I think at that point, Japan would likely step back into the FX market and intervene to try to at least slow the pace of yen weakness going forward.

And then there's a risk then that if they do intervene, that could trigger a squeeze of these kind of elevated short yen positions that have been built up in recent months. So that could certainly trigger a sharp reversal, stronger for the yen. Although we would still argue from a kind of fundamental point of view, it's hard to see how intervention right now would trigger a kind of sustained strengthening of the yen at a time when, like you say, if those fiscal concerns remain in place, and as we've seen as well recently, it looks less and less likely that the Fed will cut rates again at the start of this year.

Fundamentally, it will be harder to keep the dollar yen at lower levels, even if they intervene. And in contrast, if the snap election was to backfire and the LDP continues to perform poorly, it could trigger a sharp reversal of yen weakness by undermining confidence in the sustainability of Takeuchi's reflation policies. So what do you think about that?

Yeah, that's definitely the risk is that it's not a done deal, that they'll definitely strengthen that position in the lower house. As we've seen, the LDP's own kind of approval ratings still remain quite weak. So they're hoping that they can take advantage of the higher approval ratings for Prime Minister Takeuchi.

But that's not, like I say, without risk. And then, as we've seen as well, this week, reports are suggesting that some of the kind of main opposition parties are considering joining forces as well to try to improve their ability to win more seats. So yeah, there are risks there.

And like I say, if the LDP did disappoint in a snap election, that would then undermine confidence in the leadership of Takeuchi. And the market would then start to doubt the sustainability of these kind of reflation policies that she's looked to put in place at the start of her term in power. Thank you.

And moving on to the U.S., we've seen some tensions rising between the Fed and President Trump. So obviously, Trump wants more rate cuts and the Fed wants to maintain control of setting rates. Now, we did have CPI data released from the U.S. and it was on the weaker side of expectations.

And this was enough for Trump to call for a further rate cut. And then you have the subpoenas on Fed Chair Jerome Powell. Now, what do you think about Trump threatening the Fed's independence?

We think this latest attack from President Trump on the Fed's independence is serious from a longer term perspective. Like as we saw last year, he had previously threatened to fire Powell and then moved to fire Fed Governor Lisa Cook. So this is just the latest kind of episode in a series of attacks on the Fed from President Trump.

And as we know, there's still three years left of Trump's presidency. So we are expecting these attacks to continue and our kind of view is that we think these will kind of gradually kind of chip away at investor confidence in policymaking in the U.S. So from an FX perspective, we think in the longer term, if this continues, this is dollar negative.

It would encourage foreign investors to think about increasing their hedges on long U.S. asset positions, which would fuel more dollar selling. But in the very near term, as we've seen, it doesn't necessarily mean that the dollar is going to sell off sharply right now. We did see the dollar this week did sell off after the news that they would start legal proceedings against Chair Powell, but that those initial dollar losses were quickly reversed.

So it's not something in the very near term which is going to trigger a sharp dollar sell-off. And part of the reasoning, I think, why the market is kind of looking at this somewhat skeptically is also the view that Trump's kind of actions could backfire and that it could encourage FOMC participants to rally around Fed Chair Powell and to act more in defiance of Trump's desire for lower rates. So it could ultimately mean that the Fed keeps rates on hold for longer at the start of this year.

And then you've got the complication as well, where we've seen a number of Republican senators coming out in opposition to Trump's actions. And one senator came out and said explicitly that he wouldn't be willing to vote and pass through Trump's nominee to be the next Fed chair unless he backs down with this law case. So from that perspective as well, that could also delay and disrupt Trump's ability to put in place a new Fed chair as well.

And his latest attacks on the Fed's independence, could this create more uncertainty over whether future rate cuts are politically motivated? Yeah, I think that's certainly something which will certainly be in consideration more for market participants and even could influence, like you say, the Fed's decision making. They wouldn't obviously want to be seen to be cutting rates if it was under kind of political pressure.

So you could argue at the margin that that could be something which makes them kind of less willing to cut rates if Trump is pushing very strongly for lower rates in the future. But I'd still think on the whole that they'd still prioritize their dual mandates. And like you say, if the labor market remains weak, as we expect, then we would still expect them to follow through and to cut rates further this year.

Okay, thank you. And now we did see some of the biggest moves overnight have been in the commodity markets. So obviously we had the U.S. intervention in Venezuela and the threats to use military force in Iran.

The price of crude oil has jumped around a little bit. Now, how are the oil price swings driven by Middle East tensions and Venezuela feeding through into dollar positioning? Our view is that if you look at the reaction in the oil market so far, there's certainly been a decent jump in the oil price.

Price of Brent was up by six, seven dollars per barrel over the last couple of weeks. So the market is moving to a price in more of a risk premium there of the potential for supply disruption. So far, it doesn't look like there's been a significant kind of disruption to supply.

So our kind of view is still that we think oil prices can move lower this year. The overall view still is that it's more likely that we'll see kind of excess supply continuing in 2026, putting downward pressure on oil prices. If you look at the recent kind of relationship between the price of oil and the dollar, you can see that the correlation has turned more positive with the U.S. now, a major U.S. oil producer and other countries like Europe and Asia, bigger importers of oil and energy.

When oil prices fall, that's more supportive for growth outside of the U.S., which normally is dollar negative, obviously, if we're wrong. If Trump's actions lead to significant disruption to global oil supplies and the price of oil spikes higher in that scenario, that would be an upside risk for our forecast for dollar weakness going forward. OK, thank you.

That's all I have for today. Thank you for being here, Lee. I hope everyone enjoys their Friday and has a lovely weekend.

Bye, Ron. Bye-bye. Thank you for listening to this MUFG Global Markets podcast.

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