On Wednesday, the Japanese yen extended its recent gains, supported by a strong rally in local equities and a shift in investor expectations following Prime Minister Sanae Takaichi’s emphatic election win, a result that appears to have eased earlier concerns about aggressive fiscal expansion that might weaken the currency. The yen rose modestly against the U.S. dollar and continued to outperform other major currencies after climbing about 1% in the prior session. 

Market participants interpreted Takaichi’s broad parliamentary majority as giving her the political leverage to pursue coherent fiscal and economic policies that are less likely to undermine confidence in Japan’s public finances. This backdrop has encouraged traders to reduce short positions on the yen and has drawn foreign capital into Japanese stocks and bonds, increasing demand for the currency. 

In contrast, the U.S. dollar weakened in global markets ahead of the closely watched U.S. non-farm payrolls report, with investors assessing a string of softer U.S. data that hinted at cooling momentum in consumer spending and labour costs. The dollar drifted lower against the euro and the British pound as traders awaited the January employment figures, which are expected to show modest job growth and a stable unemployment rate. 

The prospect of slower economic activity in the United States has heightened bets that the Federal Reserve could cut interest rates later in the year, with markets pricing in roughly 60 basis points of easing by December. At the same time, some Fed officials have signalled a preference for keeping rates steady for a longer period, adding nuance to the outlook. 

Elsewhere in currency markets, other major currencies such as the Australian dollar and New Zealand dollar also firmed, reflecting both domestic monetary policy divergence and broader dollar softness.