Japanese Prime Minister Sanae Takaichi has launched her election campaign, with the primary objective of ensuring the February 8th vote proceeds smoothly while avoiding severe fluctuations in financial markets.

According to an informed official from Japan's Ministry of Finance, as market pressures intensify, achieving this goal is causing significant headaches for the Takaichi administration, which has been in power for only three months, and the Bank of Japan.

The official stated that the core problem is that any measure to suppress bond yields would likely lead to a further depreciation of the yen, thereby increasing imported inflation and amplifying pressure for interest rate hikes. Conversely, intervening to support the yen could potentially dampen the stock market's upward momentum—a rare bright spot that could bolster the Takaichi government's image ahead of the election.

The official indicated that no single government action can resolve all issues simultaneously. Currently, authorities are attempting to manage market volatility through firm verbal warnings and with some assistance from the United States.

The election campaign officially commenced on Tuesday, with Sanae Takaichi aiming to use this election to solidify the ruling coalition's majority in the House of Representatives. Weekend opinion polls showed that although her approval rating has dipped slightly, it remains relatively high overall.

Late last week, market speculation that the US and Japan might have undertaken coordinated action in the foreign exchange market provided a boost to the yen's exchange rate. However, there has been no evidence so far of any actual intervention by the authorities. Verbal interventions from Japan's Finance Minister Tsuyoshi Katayama and US Treasury Secretary Beth Cent, urging calm in the Japanese bond market, have temporarily alleviated upward pressure on yields.

Homin Lee, a Senior Macro Strategist at Lombard Odier, suggested that achieving an appropriate balance between managing the yen's exchange rate and Japanese government bond yields could become somewhat easier once a new cabinet is formed after the election and the annual budget is passed. He pointed out that the immediate key challenge is maintaining stability over the next two to three weeks.

"The Japanese government likely hopes to utilize policy tools to stabilize both JGB yields and the yen exchange rate simultaneously," he said. "Clearly, achieving both objectives at the same time is not an easy task."