Yen strengthens

The yen strengthened on Monday after Japanese Prime Minister Sanae Takaichi’s election victory, reversing six consecutive days of losses as traders bet fiscal stimulus will boost the stock market, while the US dollar eased against other major currencies.

The yen had initially pulled back slightly after Takaichi’s win on Sunday, with the currency reaching its weakest in two weeks, but then strengthened as the trading day continued. The dollar was last around 0.4 percent lower against the yen at 156.56 .

The yen also retraced losses against other currencies, which earlier saw it reach its weakest level on record against the Swiss franc and trade near the weakest point since the creation of the euro .

“While the initial yen weakness may not have played out, the outlook for the yen is still one which is likely to struggle to strengthen,” said Sim Moh Siong, currency strategist at OCBC in Singapore.

“At least in the near term, there’s also concern about intervention risk, which may be capping the upside for dollar-yen.”

Japan’s top currency diplomat Atsushi Mimura said earlier on Monday that the government is “closely watching currency movements with a high sense of urgency” after Takaichi’s coalition swept to a historic election win.

“There’s no doubt that this gives Takaichi a mandate for a pro-growth policy stance and it’s a fight between that being a good thing and debt dynamics, which have been worrying the market,” Societe Generale head of FX strategy Kit Juckes said.

Juckes said the long-end of the Japanese government bond market had so far not reacted negatively to Takaichi’s win, and as long as this remained the case, the yen was temporarily safe.

However, some volatility is expected, “as markets assess the implications of the LDP’s landslide victory for currency dynamics,” said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore.

“Under a reinvigorated LDP mandate, fiscal policy is likely to turn more expansionary, with measures such as a consumption tax cut on food now more likely,” Chao said. “While this would further strain Japan’s fiscal position, it would also add to inflationary pressures, potentially bringing forward the timeline for Bank of Japan rate hikes.”