On Japan's side, reports that Prime Minister Sanae Takaichi may push for an early general election have sparked significant concerns about fiscal and debt prospects. Media outlets noted that Takaichi could dissolve the House of Representatives shortly after the regular Diet session opens and hold a general election in February, which would force a rapid recess of parliament, delaying deliberations on the national budget and key legislation. Under current law, the Japanese government is generally prohibited from issuing bonds at will, relying for years on ad-hoc legislation to issue "deficit-covering debt" as exceptions to fill fiscal gaps. However, the existing authorization for such debts expires at the end of the current fiscal year. If new legislation fails to pass in time, the government will struggle to secure sufficient funds for next year's budget. This risk is particularly acute because Takaichi's proposed budget, a record high of nearly $783 billion, relies on debt financing for about a quarter of its total. Per government plans, most of the new debt issued in fiscal 2026 will be deficit-covering debt. Yet, Takaichi's ruling coalition holds only a slim majority in the House of Representatives and no majority in the House of Councillors, making legislative progress highly dependent on opposition cooperation. While the Democratic Party for the People previously signaled support for debt-related bills, the early election could disrupt political deals, with its leader stating their position is "in flux." Against this backdrop, markets are pricing in risks similar to the U.S. "fiscal cliff" scenario. Political uncertainty has quickly translated into financial market reactions. Expectations of an early election pushed up Japanese government bond yields, with the 10-year yield hitting a 27-year high, pressuring bond prices. Analysts note that rising political risks offer little upside for the bond market. Investors remain cautious about interest rate risks, keeping upward pressure on the yield curve. Considering Japan's debt-to-GDP ratio nears 200% and debt servicing costs continue to rise as a share of fiscal expenditure, fiscal sustainability concerns are amplified against the backdrop of potential Bank of Japan rate hikes. Additionally, expectations of looser monetary and fiscal policies this year further weigh on the yen.

The stronger dollar also supports USD/JPY. The Dollar Index (DXY) is approaching its monthly high near 99.25. In December 2025, the U.S. CPI rose 0.3% month-on-month, meeting market expectations and matching September's increase, while annual inflation held steady at 2.7%. Meanwhile, core CPI (excluding food and energy) rose 0.2% in December, below market expectations, though annual core inflation remained at 2.6%, tying the lowest level in four years. According to the CME FedWatch Tool, the probability of the Fed keeping rates unchanged this month held at 72% after the CPI report. Some major Wall Street banks delayed their rate cut forecasts from January/March to April/June, reflecting a reassessment of Fed policy expectations and supporting the DXY's rebound.

In the daily chart, the Bollinger Bands are widening upward, with moving averages diverging higher. Prices are trending strongly along the Bollinger Upper Band. After a golden cross, upward momentum remains robust, suggesting a high likelihood of testing 160 and 162. The RSI stands at 68, with higher lows, indicating dominant buying by market participants. At the same time, judging from the 4H chart, USD/JPY is oscillating upward along the Bollinger Upper Band and EMA12, remaining within an ascending channel. As long as the pair fails to break below EMA12 effectively, a test of 160 is likely. There is a possibility of a death cross, if formed, prices may pull back to around EMA12 (158.8) and the Bollinger Middle Band (158). The RSI is at 75, signaling overbought conditions, but adjustments could occur at any time. It is recommended to buy at lows.

Trading direction: Buy

Entry Price: 158.7

Target Price: 162

Stop Loss: 156.5

Support: 157.5/156.5/155

Resistance: 160/161/162