09:08 AM EDT, 10/29/2024 (MT Newswires) -- The USDJPY rose from 152.3 to nearly 154 after Japan's LDP-Komeito coalition lost its majority in the lower house election on Sunday, said UBS.

The "knee-jerk" yen (JPY) weakness was likely driven by market expectations that the Bank of Japan (BoJ) would refrain from near-term policy tightening, should political uncertainty continue to linger in the coming months, stated UBS.

The short-term direction of USDJPY is hard to call, considering the uncertainty of both political situations in Japan and the United States, wrote the bank in a note to clients. On the Japan front, it remains to be seen how long Shigeru Ishiba remains as prime minister -- and if he is replaced, the policy stance of his successor.

On the U.S. front, a Donal Trump presidential win could be a short-term boost to the US dollar (USD), while a win from his rival Kamala Harris could see the opposite reaction, according to UBS.

Pending clarity on the Japan and U.S. political situations, the bank keeps its medium-term bearish USDJPY view for several reasons. First, U.S.-Japan yield differentials suggest that USDJPY should be trading at around 146, rather than above 150.

In addition, UBS expects U.S.-Japan 10-year yield differentials and Federal Reserve-BoJ policy rate differentials to narrow by 90bps and 175bps over the next twelve months, which speaks for a USDJPY downtrend over this period.

Second, the renewed yen weakness has reignited policymaker concerns, with Japan's finance minister and vice finance minister repeatedly warning that they are watching the USDJPY

with a 'high sense of urgency'. BoJ Governor Kazuo Ueda also sounded hawkish last week, by warning about the risk of hiking rates too slowly.

Third, UBS remains wary of an abrupt reversal of the market's bullish USD sentiment if U.S. data starts to deteriorate, judging from the experience in early August when the USDJPY fell sharply following a disappointing U.S. nonfarm payroll report.

Given the bank's medium-term bearish view on the USDJPY, it cautions investors against chasing the USDJPY higher. UBS also thinks current USDJPY levels look attractive to position for a medium-term decline.

The bank's USDJPY quarter-end forecasts currently stand at 147, 143, 140, and 138 through Q3 2025.