No Yen Relief After Bank of Japan Policy Meeting as LDP Leadership Contest Formally Kicks Off, Says Mitsubishi UFG

12:29 PM EDT, 09/22/2025 (MT Newswires) -- The US dollar (USD) has continued to strengthen modestly at the start of this week, building on gains following last week's FOMC meeting, said MUFG.

It has helped to lift USD/JPY back closer to resistance provided by the 200-day moving average at around 148.60, wrote the bank in a note to clients. After hitting a low of 145.49 on Sept. 17, USD/JPY has risen even more sharply by around 1.9%.

The yen (JPY) has failed to derive support from the Bank of Japan's latest policy update on Friday, which has encouraged market participants to price in more rate hikes, stated MUFG. The yield on the two-year Japanese government bond has risen to a fresh cyclical high overnight of 0.93%.

The Japanese rate market has moved to price back in just over a 50:50 probability of the BoJ resuming rate hikes at the next policy meeting at the end of October. Market participants have been encouraged to bring forward the timing of the BoJ's next rate hike after there were surprisingly two dissenters who voted in favor of hiking rates at last week's policy meeting, and the BoJ outlined plans to start selling down its holdings of ETFs and JREITs although at a very modest pace.

Governor Ueda did maintain cautious guidance in the accompanying press conference, indicating that they want to look at the data a "little more" while reiterating that the basic stance is "we will hike rates if the outlook is realized."

Ueda noted that there was "little sign" of tariffs having an impact on Japan's economy. Overall, last week's BoJ policy update supports the bank's view that a rate hike remains on the table next month

One uncertainty that is contributing to the current BoJ caution over hiking rates further is political uncertainty in Japan. The ruling LDP party formally kicked off its leadership contest on Monday ahead of the leadership election set to take place on Oct. 4.

The five candidates who are competing to be the next LDP leader and likely prime minister of Japan are Sanae Takaichi, Shinjiro Koizumi, Yoshimasa Hayashi, Takayuki Kobayashi and Toshimitsu Motegi. Out of the five candidates, the two clear favourites are Sanae Takaichi and Shinjiro Koizumi, added the bank.

Another poll released by the Asahi newspaper over the weekend revealed that Koizumi remains the most popular candidate amongst LDP supporters to be the next leader. He secured 41% of its support compared with 24% for Takaichi, while Hayashi was the third most popular but trailed well behind securing just 10% of their votes.

It fits with MUFG's view that Koizumi is the early favorite to become the next LDP leader. A Koizumi victory could then trigger some clearer communications from the BoJ over the prospect of a rate hike on Oct. 30 and encourage a stronger yen.

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