Yen Slumps as Sanae Takaichi’s Victory Sparks Expansionary Policy Expectations

The Japanese yen fell sharply against the U.S. dollar on Monday, marking its steepest drop in five months, after Sanae Takaichi won the Liberal Democratic Party (LDP) leadership election. Her victory sets the stage for Japan’s first female prime minister and signals a shift toward more expansionary fiscal policies, adding pressure on the Bank of Japan (BOJ) to maintain its cautious monetary stance.

The yen plunged 1.5% to 149.73 per dollar—its largest single-day fall since May 12—erasing last week’s gains as Asian markets reopened. Against the euro, the yen dropped 1.3% to 175.39, nearing record lows since the euro’s creation. Takaichi, known for her pro-growth economic agenda, is expected to pursue aggressive fiscal measures to stimulate Japan’s economy, which has dampened market expectations of a near-term BOJ rate hike.

Analysts believe Takaichi’s policies could weigh on the yen further. “There’s a lot of political and fiscal uncertainty in the near term,” said Mahjabeen Zaman, head of FX Research at ANZ in Sydney. “The BOJ may remain cautious despite recent hawkish data.”

With several Asian markets closed for holidays, the dollar index stood at 98.073, recovering slightly from recent losses. Investors are also eyeing the U.S. Federal Reserve’s next move, with markets pricing in a 94.6% chance of a 25-basis-point rate cut in October, according to CME Group’s FedWatch tool. Meanwhile, the euro slipped 0.3% to $1.1710 amid political uncertainty in France following the appointment of Roland Lescure as finance minister.

Elsewhere, the New Zealand dollar fell 0.1% to $0.5823 ahead of the Reserve Bank’s policy meeting, while the Australian dollar weakened to $0.6590 and the British pound slid to $1.3432. The offshore yuan remained stable at 7.14 per dollar.