The Japanese Yen (JPY) remains on the back foot against a broadly firmer US Dollar (USD) and climbs to its highest level since February 12 during the Asian session on Tuesday. Investors remain uncertain over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) amid expectations that Japan’s new Prime Minister Sanae Takaichi will pursue aggressive fiscal spending plans and resist policy tightening. This, along with receding safe-haven demand, turns out to be a key factor that continues to undermine the JPY.
Meanwhile, BoJ Governor Kazuo Ueda dropped hawkish hints last week and signaled the possibility of a rate hike in December or January next year. Furthermore, speculations that authorities might intervene to stem further JPY weakness might hold back bearish traders from placing aggressive bets. The USD, on the other hand, has climbed to a fresh high since early August as traders scaled back their expectations for another rate cut by the US Federal Reserve (Fed) in December, which acts as a tailwind for the USD/JPY pair.
Japanese Yen bears retain control as fiscal concerns continue to fuel BoJ rate hike uncertainty
- The Bank of Japan remains reluctant to commit to further interest rate hikes amid Japan’s new Prime Minister Sanae Takaichi’s pro-stimulus stance, keeping the Japanese Yen depressed against a bullish US Dollar through the Asian session on Tuesday.
- Meanwhile, data released last Friday showed that the core Consumer Price Index in Tokyo – Japan’s capital city – has stayed above the BoJ’s 2% target for three-and-a-half-years. This, in turn, backs the case for further policy tightening by the central bank.
- Moreover, BoJ Governor Kazuo Ueda said last week that the likelihood of its baseline scenario materialising has heightened and reiterated that the central bank will continue to raise the policy rate if the economy and prices move in line with the forecast.
- Adding to this, the risk of currency intervention from Japanese authorities could limit deeper JPY losses, though sustained US Dollar buying remains supportive of the bid tone surrounding the USD/JPY pair, near its highest level since February.
- Fed Chair Jerome Powell last week pushed back against market expectations for a further reduction in the policy rate at the December meeting and assisted the USD Index (DXY) to build on a one-week-old uptrend, pushing it to a three-month top.
- The US government shutdown will hit the 35-day mark on Tuesday night and is poised to become the longest on record, previously set in 2019, as Republican and Democratic lawmakers in Congress remain deadlocked on the funding bill.
- Senate Majority Leader John Thune said he is optimistic about ending the government shutdown this week, and that the upper chamber would vote for the 14th time on the Republican-backed and House-passed funding bill later this Tuesday.
- Investors now seem worried that a prolonged government closure could cause economic damage, which, in turn, warrants caution before positioning for an extension of the USD appreciating move and further gains for the USD/JPY pair.
USD/JPY seems poised to climb further towards reclaiming the 155.00 psychological mark
From a technical perspective, last week’s breakout through the 153.25-153.30 hurdle and a subsequent strength beyond the 154.00 mark was seen as a key trigger for the USD/JPY bulls. Moreover, oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone. This, in turn, backs the case for a move beyond the 154.75-154.80 intermediate hurdle, towards reclaiming the 155.00 psychological mark.
On the flip side, any corrective pullback now seems to find some support near the 154.00 mark ahead of last Friday’s swing low, around the 153.65 region. This is followed by the 153.30-153.25 resistance-turned-support and the 153.00 mark, which, if broken decisively, might expose the 152.15 region. Some follow-through selling below the 152.00 mark would negate the near-term positive outlook and drag the USD/JPY pair to the 151.55-151.50 area en route to the 151.10-151.00 key support.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
