Yen Slumps as Japan Faces Political Turmoil, Dollar Steadies on Fed Cut Bets

The Japanese yen fell sharply on Monday after Prime Minister Shigeru Ishiba announced his resignation, creating political uncertainty in the world’s fourth-largest economy. The yen slid 0.6% against the dollar to 148.25, and hit multi-year lows versus the euro and sterling at 173.91 and 200.33, respectively. Investors fear Ishiba’s replacement could push for looser fiscal and monetary policies, with LDP veteran Sanae Takaichi seen as a contender. Former foreign minister Toshimitsu Motegi also confirmed his candidacy.

Markets remain cautious as the ruling Liberal Democratic Party lacks a clear majority, fueling volatility across the yen, Japanese bonds, and equities. The yield on Japan’s 30-year government bond surged to record highs last week, reflecting investor concerns. Analysts expect the Bank of Japan to pause rate hikes in September, with policy direction hinging on the new leadership from October onward.

Meanwhile, the dollar regained ground after Friday’s steep losses driven by weak U.S. jobs data. Nonfarm payrolls showed a sharp slowdown in August, with unemployment rising to a near four-year high of 4.3%. Traders increased bets on a Federal Reserve rate cut this month, with some pricing in the chance of a larger 50-basis-point move. Barclays economists project three 25-basis-point cuts by year-end, citing rising risks in the U.S. labor market.

The euro slipped 0.11% to $1.1709, while sterling dipped to $1.3492 after Friday’s gains. The dollar index steadied at 97.87. Political focus in Europe also turned to French Prime Minister Francois Bayrou, who faces a confidence vote that could deepen the eurozone’s political crisis.

Elsewhere, the Australian dollar edged up to $0.6558, while the New Zealand dollar eased slightly to $0.5891.