The recent leadership contest in Japan has caused a stir in the foreign exchange market, particularly for the Japanese yen (JPY). The outcome of the election has led to a weaker opening for the JPY, as HSBC Economics believed it unlikely that any Japanese leader would pursue policies to weaken the currency. However, with Takaichi’s victory speech emphasizing the importance of controlling cost-push inflation, there is limited room for the JPY to recover due to domestic policy uncertainty.

As the Diet prepares to vote on Takaichi’s bid for Prime Minister on October 15th, investors will be closely monitoring her policies and potential cabinet members. The Bank of Japan (BoJ) also has a rate decision on October 30th, where HSBC Economics expects the BoJ to increase its policy rate to 0.75%. Additionally, the upcoming FY2026 budget shaping by Takaichi could lead to increased sensitivity in JGB and JPY markets in the coming months.

Meanwhile, the ongoing US federal government shutdown has been a factor in suppressing the USD-JPY exchange rate. Although the Senate is set to reconvene today with possible votes on containing resolutions, moderate Senators from both parties may suggest a budget framework is reachable, which could be the first sign of a thaw. Historically, the USD has tended to drift slightly lower during previous shutdowns, and the current political divide makes it challenging to predict how long this could last.

In the absence of US data releases this week, investors will be eyeing the FOMC minutes due on Wednesday for any clues on the Fed’s monetary policy stance. Despite the USD remaining a relatively higher-yielding currency, its ability to decline significantly is limited due to the ongoing hunt for yield and the data vacuum caused by the shutdown.

The Japanese leadership contest has had a noticeable impact on FX markets, with the JPY experiencing weakness. The upcoming BoJ rate decision and Takaichi’s policies will be crucial in shaping the future direction of the JPY. Meanwhile, the US federal government shutdown continues to influence the USD-JPY exchange rate, and investors will be closely monitoring any developments on a budget framework and Fed’s monetary policy stance.