Yen Slides as Japan Faces Political Turmoil and Fed Eyes Rate Cuts
The yen weakens after PM Shigeru Ishiba’s resignation, while weak U.S. jobs data fuels bets on a Federal Reserve rate cut this September.
A Tumbling Yen Meets a Shaken Dollar
Global markets opened the week under pressure as Japan’s yen slumped following Prime Minister Shigeru Ishiba’s unexpected resignation. The move deepened political uncertainty in the world’s fourth-largest economy, just as investors were already digesting weak U.S. jobs data that boosted expectations of imminent Federal Reserve rate cuts.
Japan’s Leadership Crisis Sends Shockwaves
On Sunday, Ishiba stepped down, leaving Japan in a fragile position. His departure sparked immediate volatility, with the yen dropping 0.6% against the dollar to 148.25, and hitting its weakest levels in over a year against the euro (173.91) and sterling (200.33).
Markets are now bracing for a potentially prolonged leadership transition. Investors fear that Ishiba’s successor may push for looser monetary and fiscal policies particularly if Liberal Democratic Party (LDP) veteran Sanae Takaichi takes the helm. Takaichi has been a vocal critic of the Bank of Japan’s recent interest rate hikes.
Market Reactions and Expert Commentary
The political vacuum has already rattled financial markets. Last week, the selloff in Japanese government bonds drove the 30-year yield to record highs.
Hirofumi Suzuki, chief currency strategist at SMBC, said the Bank of Japan is unlikely to act aggressively in September, noting:
“A rate hike this month was never a strong probability. From October onward, policy will hinge in part on who becomes prime minister.”
Charu Chanana, chief investment strategist at Saxo, warned that volatility will linger:
“With the LDP lacking a clear majority, investors will stay cautious until a successor is confirmed. In the short term, that points to a softer yen, elevated bond yields, and choppy equity markets.”
Meanwhile, former foreign minister Toshimitsu Motegi confirmed he would contest the leadership race, signaling a potentially heated battle for control of the LDP.
U.S. Jobs Data Adds to Fed Pressure
The yen’s fall coincided with the dollar attempting to recover from steep losses on Friday. The U.S. nonfarm payrolls report showed job growth slowed sharply in August, while the unemployment rate climbed to 4.3% the highest in nearly four years.
That data cemented expectations of a Federal Reserve rate cut in September, with traders now factoring in an 8% chance of a larger 50-basis-point reduction, according to the CME FedWatch tool.
Sterling eased 0.11% to $1.3492 after strong gains on Friday, while the euro slipped 0.11% to $1.1709. The dollar index steadied at 97.87 following a sharp 0.5% decline.
Barclays economists wrote in a note:
“A September cut now looks inevitable, with a 25bp move most likely. We also expect an additional 25bp cut in October, leaving the Fed on track for three cuts this year.”
Politics, the Fed, and Market Volatility
The Fed’s independence also came under political fire last week. Treasury Secretary Scott Bessent called for tighter oversight of the central bank’s authority, while President Donald Trump continued pressing for more aggressive rate cuts. Reports suggest Trump is weighing three potential candidates to replace Jerome Powell as Fed chair.
Elsewhere, the Australian dollar inched up to $0.6558, while the New Zealand dollar slipped to $0.5891, reflecting a cautious global mood.
What Lies Ahead
The coming weeks will be critical for both Tokyo and Washington. Japan must navigate a turbulent leadership transition while trying to stabilize markets already nervous about the Bank of Japan’s policy trajectory. In the U.S., the Fed faces growing political scrutiny and mounting pressure to act decisively as signs of a labor market slowdown deepen.
For now, the yen remains under pressure, the dollar is fragile, and global investors are bracing for heightened volatility across currencies, bonds, and equities.
✅ (Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should consult professional advisors before making investment decisions.)
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