06:51 AM EDT, 09/09/2025 (MT Newswires) -- The yen (JPY) has strengthened overnight Monday, resulting in USD/JPY falling back below the 147.00 level and moving back closer to the low from Friday after the release of the weak United States nonfarm payrolls (NFP) report at 146.82, said MUFG.

The quick reversal of the yen's initial losses after Prime Minister Shigeru Ishiba's resignation over the weekend supports the bank's decision to maintain its short USD/JPY trade recommendation.

MUFG remains unconvinced that political uncertainty in Japan will prevent USD/JPY from moving lower alongside the dovish repricing of Federal Reserve rate cut expectations. Short-term yields in the U.S. have adjusted sharply lower and are trading close to year-to-date lows after the NFP report for August reinforced expectations for the Federal Reserve to resume rate cuts this month.

At the same time, the yen has derived some support overnight Monday from media reports in Japan that the LDP is considering holding a full-scale leadership election on Oct. 4, including the participation of just over one million rank-and-file party members, according to broadcasters NHK and TBS. NHK reported that LDP officials see a need to sound out all its members and not just members of the Diet.

Holding a full-scale election would potentially help to dampen downside risks for the yen, given pro-reform Agriculture minister Shinjiro Koizumi is more popular among LDP supporters than one of his main rivals to be the next LDP leader, Sanae Takaichi, according to recent media surveys.

A recent Yomiuri Shimbun survey from Aug. 25 revealed that Koizumi (31%) was more popular amongst LDP supporters than Takaichi (12%), who was less popular than Ishiba (23%). She reportedly has stronger backing from lawmakers and some heavyweights within the LDP party, according to Bloomberg.

Apart from political uncertainty potentially delaying the timing of the Bank of Japan's next rate hike, the other main downside risk for the yen would be if Takaichi won the leadership vote, given her strong preference for loose fiscal and monetary policies, stated MUFG.

The new LDP leader would still have to work with other parties, given that the government has lost its majority in both the upper and lower houses, added the bank. Opposition parties were campaigning for looser fiscal policy in the Upper House elections, so there appears to be less resistance to looser fiscal policy.

A full-scale leadership election would give each of the 295 LDP parliamentary lawmakers one vote each and allocate an equal number of votes to party members for a total of 590 ballots. In contrast, in an abridged version, lawmakers would get one vote each, while each prefectural branch would get three for a total of 436 ballots. To take part in the leadership contest, potential candidates will need to secure the backing of 20 other lawmakers.