Japan's Prime Minister Sanae Takaichi has pledged not to finance tax cuts through bond issuance, easing market concerns over fiscal deterioration and reducing political uncertainty. Worries about potential Japanese government intervention in the currency market have limited the yen's decline, while safe-haven demand and expectations of a Bank of Japan interest rate hike have stimulated yen strength. The yen is on track for its largest weekly gain since November 2024, having appreciated approximately 2.8% as of Thursday.

Market confidence that Prime Minister Sanae Takaichi's election victory will enable her to expand fiscal stimulus while maintaining financial market stability has bolstered the yen's prospects for its strongest weekly performance since November 2024.

On Thursday, the yen rose over 0.3%, marking its fourth consecutive day of gains and bringing its weekly appreciation to around 2.8%. Concurrently, safe-haven demand amid ongoing selling pressure on risk assets has provided additional support for the currency.

Analysts suggest that Sanae Takaichi's victory is seen as reducing political uncertainty and mitigating risks of worst-case fiscal scenarios, helping drive yen strength and pulling Japanese government bond yields down from multi-year highs reached last month.

Japan's top currency official, Atsushi Mimura, stated that despite the yen's rebound this week, the government remains highly vigilant regarding foreign exchange movements. Concerns over potential government intervention to support the yen have also limited the currency's downside.

Fiscal policy concerns have diminished after Takaichi acknowledged market worries about the two-year food consumption tax reduction plan during a press conference on Monday, reiterating that the measure would not be funded by bond issuance. This stance has further alleviated fears of fiscal deterioration.

According to Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank in New York, the yen's strengthening trend is driven by fading fiscal concerns following the Liberal Democratic Party's overwhelming victory, coupled with expectations of a Bank of Japan rate hike.

Overnight index swaps indicate about a 78% probability of a Bank of Japan rate hike in April.

Bloomberg strategist Michael Ball noted that the yen strengthened after Takaichi's historic victory as traders price in a rare policy combination for Japan: tax cuts that do not worsen the deficit, potentially funded from internal financial pools.

Ball emphasized that the risk of this policy mix lies in the possible sale of foreign exchange reserves, which would support yen buying in the short term but increase volatility, as markets cannot predict how far officials are willing to go.

Speculation about Japanese government intervention persists due to the top currency official's heightened alertness, with such expectations themselves curbing the yen's decline.

On January 23, the yen surged as much as 1.75% intraday, its largest gain since last August. This sudden move sparked widespread speculation about possible Japanese government intervention, potentially even coordinated with the United States.

However, U.S. Treasury Secretary Bessent later stated that the U.S. consistently maintains a strong dollar policy and "absolutely would not" intervene to support the yen. Japanese Finance Minister Tsukasa Koyama mentioned she remains in close contact with Bessent, sharing responsibility for maintaining stability in the dollar-yen exchange rate.

Pat Locke, a foreign exchange strategist at J.P. Morgan, previously commented that Bessent's non-intervention remarks do not rule out additional verbal or even actual intervention. However, he reiterated a core stance that setting the right fundamentals is crucial for the foreign exchange market in the long term, not only for the U.S. but for other countries including Japan.

Investors will focus on Friday's speech by Bank of Japan board member Naoki Tamura, known for his hawkish views, as well as U.S. CPI data, to gauge the outlook for U.S.-Japan interest rate differentials and the yen's direction.