The Japanese yen fell in Asian trading on Monday against a basket of major and minor currencies, extending its losses for the second consecutive day against the US dollar and retreating from its two-week high amid ongoing profit-taking and market correction. The decline also follows key political developments in Japan that bring Sanae Takaichi significantly closer to becoming the countrys next prime minister.

Takaichi, known for her support of fiscal and monetary stimulus, has now become the near-certain frontrunner for Japans top political post after reportedly securing crucial political backing.

According to Kyodo News, the ruling Liberal Democratic Party (LDP) led by Takaichi and the Japan Innovation Party will formalize an alliance on Monday, ahead of the parliamentary vote for prime minister scheduled for Tuesday.

Price Overview

USD/JPY rose 0.4% to 151.20 yen, up from an opening of 150.62 yen, after touching an intraday low of 150.34 yen.

The yen ended Fridays session down 0.15% versus the dollar its first loss in four sessions as investors took profits after the currency had reached a near two-week high of 149.37 yen earlier in the day.

For the week, the yen gained about 0.35% against the dollar, marking its second weekly rise in the past three weeks amid ongoing political uncertainty in Japan.

Political Developments

Kyodo reported that the ruling Liberal Democratic Party and the Japan Innovation Party are preparing to formally strengthen their alliance on Monday a move aimed at securing a parliamentary majority ahead of Tuesdays vote to select Japans next prime minister.

Sanae Takaichi, who is on track to become Japans first female prime minister, had faced a major political setback earlier this month when the LDPs longtime coalition partner, Komeito, abruptly withdrew after a 26-year alliance.

However, the new partnership with the right-leaning Japan Innovation Party could give Takaichi a powerful boost toward leadership, as both parties share common views on economic and defense policy including support for loose monetary policy and higher defense spending to strengthen Japans military capabilities.

Improved Risk Appetite

The yen also weakened as demand for safe-haven currencies eased, with global risk sentiment improving amid signs of easing trade tensions between Beijing and Washington and reduced concerns about US regional banks.

Japanese Interest Rates

Bank of Japan Governor Kazuo Ueda said last week that the central bank remains prepared to raise its key interest rate if the outlook for growth and inflation continues to improve.

Following Uedas comments, market pricing for a 25-basis-point rate hike at the October meeting rose from 25% to 35%.

Yen swap markets now indicate a 50% chance of a rate hike by December, up from 41% prior to Uedas remarks.

Investors are awaiting further data on Japans inflation, unemployment, and wage growth to reassess these expectations.