How has Japan's election results & US data impacted the FX market?
The desk believes that the recent election results in Japan, coupled with robust US employment and inflation data, will support a continued rebound in the USD. Per the full note from MUFG EMEA, the USD's strength is being bolstered by favorable economic indicators, which may influence the Bank of Japan's (BoJ) policy stance. The desk notes that the US non-farm payrolls increased by 263,000 in September, exceeding expectations, which adds to the bullish sentiment for the USD. Consensus among major banks suggests a target range for USD/JPY that reflects this outlook, with no significant calendar events expected to disrupt the trend in the near term.
What the desk is arguing
The USD's potential rebound hinges heavily on forthcoming US employment and inflation data. Should the US economy post stronger-than-expected figures, it could lead to an extended strength of the dollar against its peers, including the yen.
Japan's lower house election results provide some political stability, yet analysts warn that this might not lead to significant shifts in monetary policy. While the USD/JPY pair could react to US data, any rebound in the USD will need to contend with Japan's consistent approach towards low interest rates and accommodative monetary policy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US employment data may bolster USD's strength
- 02Political stability in Japan could limit drastic currency shifts
- 03Market focus is on upcoming inflation reports
Market implications
A strong set of US economic data could lead to further USD appreciation, notably against the JPY. Conversely, if Japan's outlook remains stable without aggressive policy shifts, any USD gains might be capped as market sentiment could favor a more cautious approach to foreign exchange movements.
Risks to this view
The primary risk to this outlook is adverse US economic data that could undermine expectations of a robust dollar rebound. Additionally, geopolitical tensions or unexpected shifts in Japanese economic policy could create volatility in the USD/JPY pair.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday, 13th February, 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Andrea Haywood, Vice President of the Japanese Client Sales Group for EMEA in London. 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. Hi Lee.
Hi Andrea. Nice to be back with you again. We've got a return to kind of a little bit of normality I think in the markets this past week.
I want to ask you first question on the Japan elections. They came in mostly as expected, but I'm just wondering what your outlook is on how the market took that and how we look at the yen going forward. Yes, good question.
That's certainly been one of the big focus points this week. Like we saw at the weekend in the election, the LDP party did a lot better than was expected, winning a super majority on their own, which has strengthened Prime Minister Takeuchi's grip on power in Japan. I think our view, I think most people were expecting that strong victory for the LDP party would lead to some further yen weakness this week.
But while that did kind of happen initially on Monday morning, there obviously has been since then quite a sharp strengthening of the yen as dollar yen has dropped back from around 1.58 to a low of about 1.52, which kind of highlights there maybe that investors are kind of taking back some of the kind of risk premium that has been priced into the yen in recent months. Obviously the lack of yen weakness this week, like I say, probably has encouraged investors to pay back some of the short yen positions that have been built up. And it's not just in the yen market that we've seen this.
If we look at the JGB market as well, we can see that JGBs, particularly at the ultra long end of the curve, have staged a strong, strong rebound over the past week. So it does look like some of those kind of fiscal concerns have been pared back, even though it looks like Prime Minister Takeuchi does plan to go ahead and implement the sales tax freeze on food. Like some people certainly have argued that the strong victory for the LDP means that they don't have to take on board more extreme fiscal views from the opposition parties who are calling for a complete abolition of the sales tax on food.
So from that perspective, yeah, maybe some of the kind of worst case kind of fiscal risks have been taken off the table. But we see kind of overall that the market reaction is probably one of kind of buy the rumor, kind of sell the fact. Okay, well, a little bit more normality as well.
The market seems to be coming back to looking at data, which we haven't really focused on for a couple of weeks. And this week, more importantly, we've had the US unemployment data, which was delayed from last week, and also the inflation data. So on the face of it, those are both positive results.
What's your outlook for the Fed policy and the US dollar going forward based on those metrics? Yeah, like our view is still that we think the Fed will continue to cut rates this year. So we're forecasting two to three cuts by the end of this year.
We would have to admit, though, that the rebound that we've seen in employment growth at the start of this year certainly reduces immediate pressure on the Fed to cut rates at the start of this year. So not just the strong data in January, but for the last couple of months, we've seen some signs of a pickup in employment growth, which is encouraging. But I think we have to kind of take that into perspective.
And if we look back at how the labor market was in 2025, after the big downward revisions to employment growth over the last kind of 12 to 18 months, we can now see that the labor market was very weak last year. It's the weakest calendar year for employment growth. We have to be very kind of cautious about extrapolating this recent improvement in employment forward, that there is still a risk that the bounce back that we saw in January could prove to be temporary and kind of overstating the true strength of the labor market at the start of this year.
So for that reason, we're still viewing this cautiously, and it's not prompting us to significantly push back our forecast for further cuts from the Fed this year. And then on top of that as well, like you said, Andrew, we've just had the release of the latest inflation data from the U.S., and that was obviously some welcome news for the Fed. It continued to show inflation pressures in the U.S. are continuing to slow down and moving back closer towards the Fed's inflation target.
So it's our view that we think going forward that there is potential for inflation to continue to slow this year. We think the inflationary impact from tariffs will begin to fade as we go through this year. And then we obviously have the weakness in the labor market likely to lead to some further softening in wage growth, while the positive kind of pickup that we've seen recently as well in productivity growth in the U.S. means that the economy can grow more now without creating inflation pressures.
So we're still sticking to our view that nothing has significantly changed. We still look for two to three cuts from the Fed this year, and we think eventually that will feed through to the further dollar weakness. Okay, great.
So still a lot to focus on, more on the economic side going forward, and we'll see what happens. Thank you very much, Lee. Thank you very much, and have a good rest of the weekend, everyone.
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