The Japanese yen rose in Asian trading on Friday against a basket of major and minor currencies, extending its gains for the fourth consecutive session against the US dollar and reaching its highest level in nearly two weeks. The currency was on track for a weekly gain following hawkish comments from Bank of Japan Governor Kazuo Ueda, which strengthened expectations of an interest rate hike in Japan before the end of the year.

The yens advance was also supported by a decline in the US dollar across foreign exchange markets, as well as by growing political activity among Japans opposition parties seeking to unite behind a consensus candidate for prime minister a move aimed at ending the Liberal Democratic Partys long-standing political dominance.

As a result, Sanae Takaichi faces mounting challenges on her path to power, especially after the sudden withdrawal of Komeito, the Liberal Democratic Partys traditional coalition partner, which significantly weakens her chances and deepens political uncertainty in Japan during this critical period.

Price Overview

USD/JPY fell by 0.35% to 149.90 yen its lowest level since October 6 from an opening of 150.42, after hitting a high of 150.43.

The yen ended Thursdays session up 0.4% against the dollar, marking its third consecutive daily gain following Uedas comments.

Weekly Performance

Over the course of the week which officially concludes at todays market close the Japanese yen is up about 0.8% against the US dollar and on track to record its second weekly gain in the past three weeks.

Kazuo Ueda

Bank of Japan Governor Kazuo Ueda said in Washington on Thursday that the central bank remains prepared to raise its key interest rate if the likelihood of achieving its growth and inflation forecasts increases.

Japanese Interest Rates

Following Uedas remarks, market pricing for a 25-basis-point rate hike by the Bank of Japan at its October meeting rose from 25% to 35%.

The yen swap market now indicates a 50% probability of a rate hike by December, up from 41% before Uedas comments.

US Dollar

The US Dollar Index fell by 0.15% on Friday, extending losses for the fourth consecutive session and hitting a two-week low of 98.16 points, reflecting continued weakness in the American currency against a basket of global peers.

This decline came amid renewed trade tensions between the United States and China, as well as less hawkish comments from Federal Reserve officials that reinforced expectations for two rate cuts before the end of this year.

Political Developments in Japan

Japans political scene remains in turmoil following the resignation of Prime Minister Shigeru Ishiba on September 7 and the continuation of his cabinet in a caretaker role. Sanae Takaichi, leader of the Liberal Democratic Party, faces a steep challenge in her bid for the premiership after the sudden withdrawal of Komeito from the ruling coalition on October 10, which cost her party its parliamentary majority.

This development has opened the door for opposition unity, with the Constitutional Democratic Party Japans largest opposition group seeking to form an alliance with Komeito to support a consensus candidate, Yuichiro Tamaki, who is emerging as a strong contender to lead a united opposition bloc.

Although the Liberal Democratic Party remains the largest parliamentary group with 196 seats, its waning influence and the growing momentum of the opposition point to a possible political shift in the worlds fourth-largest economy.

Opinions and Analysis

A note from Bank of America highlighted that attention is now turning toward the runoff in Japans prime ministerial election, which will take place in two rounds. The two candidates with the highest votes in the first round will advance if neither secures an outright majority. The note explained that if the House of Representatives and House of Councillors choose different candidates, the decision of the lower house will take precedence.

The bank added that despite the challenges facing the opposition in unifying their ranks, the three main opposition parties collectively hold more seats than the Liberal Democratic Party. It emphasized the importance of monitoring ongoing discussions, including Komeitos position, to determine which side it will support in the decisive runoff.