Analysis-A crisis of confidence in the yen looms over Japan PM Takaichi's election gamble

By Kevin Buckland and Rocky Swift

TOKYO, Jan 27 (Reuters) - The spectre of coordinated yen buying by Tokyo and Washington has propped up Japan's currency, but history suggests the impact of an actual intervention could be limited, especially because Prime Minister Sanae Takaichi is basing her snap election campaign on expanded stimulus measures.

With a ​vote for the lower house of Parliament in less than two weeks serving as a mandate on Takaichi's mission to reflate the economy, Japanese authorities are openly hinting ‌at stepping into the markets for the first time since July 2024.

The yen's protracted decline this year has become a symbol of the market's escalating worries over Japan's financial health. Its relentless march lower has come as Japanese government bond ‌yields have soared to record highs, which would ordinarily be supportive of the currency.

"The currency is reacting aggressively," said Toshinobu Chiba, a Tokyo-based fund manager at Simplex Asset Management, who believes the yen could spiral to as weak as 180 per dollar for the first time since 1986, a year after the Plaza Accord allowed for a major depreciation of the dollar, if Takaichi scores a big election win and has a mind to expand her stimulus plans.

Chiba, like many market participants, expects dollar-yen levels beyond 160 to trigger an initial round of intervention, "but there's not so much impact the Ministry of ⁠Finance can have on the market."

That's because "most investors do not trust ‌Japan's fiscal control," he said. "It's a sovereign credit issue."

Japan's government debt already stands at roughly 230% of gross domestic product, the highest in the developed world.

Now Takaichi - along with her main political opponents - has pledged to suspend the consumption tax on food - the source of around 5 trillion yen ($32.36 billion) ‍in revenue a year - without saying how she will make up the shortfall.

Fears of a fiscal blowout came to a head last week, with long-dated JGB yields vaulting to record highs, while stocks suffered their most severe selloff in three months - all while the yen tested record troughs versus the euro and Swiss franc.

A "Sell Japan"-style market rout that is self-reinforcing and spans asset classes is not something Takaichi can afford as she ​heads into an election. So on Friday, with traders offloading the yen despite hawkish signals from the Bank of Japan, the currency suddenly spiked and then spiked again several hours ‌later, in what appeared to be the result of rate checks from both the BOJ and the Federal Reserve Bank of New York.