The Japanese Yen (JPY) recovers a major part of its Asian session losses against a broadly weaker US Dollar (USD), dragging the USD/JPY pair back closer to mid-150.00s in the last hour. Recent comments from Bank of Japan (BoJ) officials suggested that the central bank will stick to its policy normalization path and raise interest rates again by the year-end. Moreover, concerns about economic risks stemming from escalating US-China trade spat, a prolonged US government shutdown, and geopolitical tensions drive some safe-haven flows towards the JPY.
Any meaningful JPY appreciation, however, seems elusive in the wake of renewed concerns about Japan’s fiscal health. Reports suggest that the ruling Liberal Democratic Party (LDP) and the Japan Innovation Party (JIP) have agreed to form a coalition government, setting the stage for Sanae Takaichi to become Japan’s first female Prime Minister. This revives expectations for big spending and speculations that the BoJ might delay raising interest rates further. This, along with easing concerns about an all-out US-China trade war, should keep a lid on the JPY.
Japanese Yen might struggle to attract buyers amid the recent political developments
- Kyodo news agency reported that Japan’s Liberal Democratic Party and the Japan Innovation Party, known as Ishin, are set to sign an agreement sealing their alliance on Monday. The new coalition will vote in parliament on Tuesday for Sanae Takaichi to be Japan’s first female Prime Minister.
- Takaichi supports the former Premier Shinzo Abe’s economic policies, which advocated for big spending and monetary stimulus to support the economy. Takaichi is also expected to oppose further policy tightening by the Bank of Japan, which, in turn, is seen exerting pressure on the Japanese Yen.
- Furthermore, global trade uncertainties could allow the BoJ to maintain the status quo at this month’s meeting. However, BoJ Deputy Governor Shinichi Uchida said on Friday that the central bank will continue raising interest rates if economic and price developments move in line with its forecasts.
- Meanwhile, inflation in Japan has stayed at or above the BoJ’s 2% target for more than three years, and the economy expanded for a fifth straight quarter in the three months through June. This, in turn, keeps the door open for another interest rate hike by the BoJ, either in December or in January.
- In contrast, the CME Group’s FedWatch Tool indicates that traders have fully priced in a 25-basis-point rate cut by the US Federal Reserve in October and in December. This fails to assist the US Dollar to capitalize on Friday’s move higher and could offer support to the lower-yielding JPY.
- The US government shutdown has now stretched into its 20th day, with the Senate preparing for its 11th vote on the stopgap funding bill later this Monday amid the unresolved impasse between Democrats and Republicans. This might contribute to capping gains for the USD/JPY pair.
USD/JPY is likely to attract some dip-buyers; 150.00 holds the key for bullish traders
The intraday move up lifts spot prices beyond the 38.2% Fibonacci retracement level of the recent decline from the monthly peak. Moreover, positive oscillators on 1-hour/daily charts back the case for a further appreciating move towards the 151.75 confluence – comprising the 61.8% Fibo. retracement level and the 200-hour Simple Moving Average (SMA). A sustained move beyond the latter should allow the USD/JPY pair to surpass the 152.00 mark and climb further towards the next relevant hurdle near the 152.25 supply zone en route to the 153.00 mark.
On the flip side, the 150.50-150.45 region now seems to protect the immediate downside ahead of the 150.25 zone, or the 23.6% Fibo. retracement level and the 150.00 psychological mark. A convincing break below the latter might expose the 149.40-149.35 area, or a nearly two-week low touched on Friday. The USD/JPY pair could extend the fall further towards the 149.00 round figure before eventually dropping to the 148.45-148.40 strong horizontal resistance-turned-support.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
