The yen slipped back below 158.00 on Wednesday, trading at 158.12 after touching a session low of 157.39, as the Democratic Party’s victory in U.S. midterm elections pulled down Treasury yields and revived fears of slower growth. The pair opened the session at 158.47, a fraction below Tuesday’s close of 158.69, which marked a near three-week high. By the European session, the dollar had recovered nearly half of the ground lost to the yen on the election news, trimming the day’s decline to 0.36%. The dollar’s broad decline reached the yen, but not cleanly, leaving the currency pair stuck in a tight 121-pip range.
Democratic Sweep Drives 10-Year Yield to 4.92%
Investors sold U.S. Treasuries in response to the election result, pushing the 10-year yield down to 4.921% and briefly touching 4.89% overnight. The drop in yields reflects expectations that a Democratic-controlled Congress will oppose plans for large-scale tax cuts and increased government spending, which would reduce Treasury issuance and fiscal stimulus. Markets also anticipate tighter regulation of the artificial intelligence sector and slower data-center construction. These factors have pushed investors into safe-haven bonds, weighing on the dollar and supporting the yen.
The growth outlook complicates the Federal Reserve’s path. A slowdown in U.S. economic growth could dampen the dollar’s appeal and reduce the central bank’s need for further rate hikes. The Fed raised rates to a 3.75% to 4.00% range in September, and markets currently price a 78% chance of a 25 basis-point hike at the December 8 to 9 meeting. Even with a Democratic sweep, however, the Fed may face constraints in tightening policy further if growth risks rise.
While some strategists view the post-election dollar decline as a modest, short-lived reaction, others see the potential for a deeper move. A Democratic Congress could lead to lower oil prices, which would benefit Japan and the euro area as net importers of energy. A shift of capital from the United States to Europe and Asia as American exceptionalism fades would also support the yen. The dollar’s recovery to 158.12 suggests the market is weighing these competing forces.
Bank of Japan Holds at 1.25% and Signals December Move
The Bank of Japan held its policy rate steady at 1.25% on October 30, a decision made by an 8-to-1 vote, with one board member dissenting in favor of a hike to 1.50%. The central bank declared that underlying CPI inflation is at a level generally consistent with its 2% target, a shift from previous language that inflation was “approaching” 2%. Governor Kazuo Ueda reinforced the hawkish tone, stating that the bank will judge the need for a rate hike at each meeting, including the next one. The BoJ also accelerated the pace of its exchange-traded fund sales to roughly ¥860 billion, or $5.5 billion, a year.
Markets have priced the December hike heavily. Financial data shows an 80% probability of a 25 basis-point increase in December, a figure that rose after Ueda’s press conference. The central bank’s staff estimate that Japan’s neutral rate sits in the 1.1% to 2.5% range, and with bank lending growth still strong, the BoJ has room to raise rates further before reaching that neutral level. The next policy decision is scheduled for December 18.
For USD/JPY, the widening gap between U.S. and Japanese yields remains a key constraint. The Fed’s policy rate sits 275 basis points above the BoJ’s 1.25% rate, while the 10-year yield spread stands at roughly 215 basis points. A narrowing of this gap could support the yen, but the market has already priced in much of the December hike. The December outcome hinges on whether the Fed pauses or hikes, with a Fed pause followed by a BoJ hike being the most bullish scenario for the yen.
Japan Spends ¥27 Trillion to Defend the Yen
Tokyo’s intervention activity has set a new record this year. Japan’s Ministry of Finance has spent more than ¥27 trillion defending the yen, surpassing the previous annual record of roughly ¥15 trillion set in 2024. The spending came in two major waves. The first wave, in the spring, totaled ¥11.73 trillion between April 28 and May 27, including a single-day record of ¥6.28 trillion on April 30. The second wave, which included coordinated action with the U.S., totaled ¥15.4 trillion between July 30 and August 26.
The July coordinated intervention, the first since 2011, sent USD/JPY down from around 163 to below 158 within an hour. Finance Minister Satsuki Katayama has repeatedly warned that authorities are prepared to act again against disorderly or excessively speculative moves. The market has drawn its own line near 160, with traders wary of renewed intervention capping the dollar’s upside. The yen’s limited gains following the U.S. election reflect this persistent threat of intervention and the wide interest rate gap that still favors the dollar.
Positioning: Hedge Funds Trim Yen Shorts as the Carry Trade Gets Riskier
Speculators have been reducing their bets against the yen. Hedge funds reportedly trimmed their short yen positions further in the latest CFTC positioning data. That’s a meaningful shift for a currency that has been one of the most popular funding sources for global carry trades. The reduction in net short exposure suggests that traders are adjusting their risk appetite as the interest rate differential narrows and intervention risks remain high.
