The Japanese yen fell broadly across Asian markets on Monday at the start of the weeks trading, resuming its decline against a basket of major and minor currencies after Fridays brief rebound against the US dollar. The yen once again approached its lowest level in eight months, remaining under sustained pressure due to ongoing political developments in the worlds fourth-largest economy.

Japans new Liberal Democratic Party (LDP) leader, Sanae Takaichi, suffered a major setback after the Komeito Party the LDPs long-time coalition partner withdrew from the ruling alliance. Takaichi is now scrambling to secure enough parliamentary support to become Japans first female prime minister.

If Takaichi fails to gain sufficient backing in parliament, she may be forced to lead a minority government or call an early election a scenario that could trigger further pressure on the yen and Japanese markets.

Price Overview

USD/JPY today: The dollar rose 0.75% against the yen to 152.28, up from Fridays closing level of 151.13, after touching a low of 151.73 earlier in the session.

On Friday, the yen had climbed 1.25% versus the dollar snapping a seven-day losing streak after hitting an eight-month low of 153.27 earlier that day.

That rebound marked the yens biggest one-day gain since August 1, driven by Komeitos withdrawal from the ruling coalition and renewed fears of USChina trade tensions.

For the week, the yen fell 2.5% against the dollar its third weekly loss in a month and the sharpest since September 2024 following Takaichis victory in the LDP leadership race.

Political Developments

Markets quickly reassessed the political outlook for Japans new LDP leader, Sanae Takaichi, after Komeito the LDPs traditional coalition partner withdrew from the alliance on Friday, dealing a heavy blow to her hopes of becoming the countrys first female prime minister.

The partnership between the LDP and Komeito had lasted roughly 26 years, providing the parliamentary support needed to pass legislation. However, disagreements over party financing and unmet demands from the junior partner led Komeito to announce its departure from the coalition.

Without Komeito, the LDP no longer commands a majority in both chambers of parliament, raising doubts about Takaichis ability to form a stable government. She must now persuade other parties to cooperate in order to assemble a viable parliamentary administration.

Markets are closely watching whether Takaichi can secure sufficient backing or will instead face the prospect of a fragile minority government or early elections outcomes that could weigh heavily on the yen and Japanese equities.

Analysts Views

Carol Kong, currency strategist at Commonwealth Bank of Australia in Sydney, said: The USD/JPY rally has been almost uninterrupted, and it seems that only profit-taking could temporarily halt the climb.

She added: In the short term, confirmation of Takaichis appointment as prime minister and the upcoming Bank of Japan meeting in October may act as catalysts for further yen weakness, especially if she reinforces her dovish fiscal and monetary stance and the central bank signals no near-term rate hikes.

Karl Schamotta, chief market strategist at Corpay in Toronto, noted that traders have grown increasingly skeptical about Takaichis ability to push through fiscal stimulus and resist the Bank of Japans tightening plans.

He added: This reflects Japans underlying inflation dynamics households are demanding change as inflation remains elevated.

Interest Rate Outlook

Following Takaichis leadership victory, market pricing for a 25-basis-point rate hike by the Bank of Japan in October fell from 60% to 25%.

Yen swap markets now imply just a 41% chance of a rate hike by December down from 68% before the LDP leadership election.