SINGAPORE, Feb 11 - The Japanese yen held on to earlier gains on Wednesday as a strong showing in Japan’s stock market and market bets about Prime Minister Sanae Takaichi’s election success supported the currency. Investors interpreted her resounding win as giving her the authority to pursue policies perceived as more fiscally disciplined, an outlook that has helped strengthen both the yen and Japanese government bonds.
At the Tokyo cross, the yen was trading at 154.22 per dollar, up 0.1% on the day and extending a roughly 1% rise from the previous session when it appreciated against a range of currencies. The euro was exchanging hands at 183.60 yen following a 1.2% fall on Tuesday, while sterling was weaker against the yen, down 0.2% at 210.17 after a 1.3% retreat the day before. Trading volumes in Asia were light as Japanese markets were closed for a holiday.
Market participants have also driven foreign inflows into Japanese equities on expectations that monetary or fiscal measures could translate into more spending by consumers and corporations. That flow of capital into Japanese stocks increases demand for the yen as investors convert foreign currency into Japanese currency to buy equities.
Vishnu Varathan, head of macro research for Asia ex-Japan at Mizuho, said the scale of Takaichi’s victory gives her greater latitude to reshape policy. "Such a sweeping victory hands the Takaichi regime better control over the JGB bearish and the yen bearish aspects of the so-called Takaichi trade," he said. "She can have a more coherent fiscal policy... she’s definitely got a plan which is going to make numeric sense, so there should be less doubt around that. What she needed was the political capital to pull it off, without having to make multiple compromises to many parties who want to do more (stimulus)."
Nomura’s JPY FX and rates strategist Yusuke Miyairi noted that dollar/yen could move lower toward the 150 level if investors increasingly see Takaichi as adopting a more fiscally responsible stance, reflecting expectations that narrowing U.S.-Japan rate differentials would support the yen.
Across global markets, attention was fixated on the U.S. labour market as investors awaited the non-farm payrolls report due later on Wednesday. Consensus expectations called for payrolls to have increased by 70,000 in January, with the unemployment rate forecast to remain unchanged at 4.4%.
Heading into the release, the dollar showed signs of vulnerability. The euro was trading slightly higher at $1.1899, up 0.04%, while sterling ticked up to $1.3646. The dollar's weakness followed overnight U.S. data showing slower-than-expected retail sales for December and a separate report indicating that the growth in U.S. labour costs unexpectedly slowed in the fourth quarter.
OCBC strategists highlighted the significance of those reports for consumer momentum. "U.S. retail spending disappointed in December, and further consumer momentum now hinges on an improving labour market, putting added focus on today’s January employment report," they wrote in a note.
Commenting on broader labour trends, White House economic adviser Kevin Hassett said on Monday that Americans could see smaller job growth numbers in coming months as a result of lower population figures and higher productivity. That view contributes to caution among investors forecasting U.S. employment gains.
Markets are now pricing in roughly 60 basis points of easing from the Federal Reserve by December, even as some Fed policymakers have signaled that interest rates could remain on hold for an extended period.
In currency moves beyond the yen-dollar pair, the dollar was down 0.12% against a basket of currencies at 96.80. The Australian dollar rose to $0.7086, up 0.16%, while the New Zealand dollar traded at $0.60495, an increase of 0.11%.
In summary, the yen's recent strength reflects a combination of equity inflows and changing perceptions about likely fiscal policy under Japan’s new political leadership, while U.S. economic indicators and incoming labour market data are the primary drivers of dollar direction in the near term. Investors will be watching the U.S. payrolls release for confirmation of the labour market’s resilience or further signs of softening.