The Japanese Yen (JPY) sticks to its bullish bias against a broadly weaker US Dollar (USD) for the second straight day and climbs to a one-week high during the Asian session on Wednesday. The risk of a further escalation of US-China trade tensions, along with geopolitical tensions and concerns about a prolonged government shutdown, continues to underpin demand for traditional safe-haven assets, including the JPY. Meanwhile, comments from Finance Minister Katsunobu Kato earlier this week fueled speculations about a possible government intervention. This turns out to be another factor lending support to the JPY.
The USD, on the other hand, retreats further from its highest level since early August, touched last week amid dovish Federal Reserve (Fed) expectations. This marks a significant divergence in comparison of bets for an imminent rate hike by the Bank of Japan (JPY) and contributes to driving flows towards the lower-yielding JPY. However, the growing acceptance that domestic political uncertainty could put pressure on the BoJ to delay rate hikes further might hold back the JPY bulls from placing fresh bets. Hence, it will be prudent to wait for strong follow-through buying before positioning for any meaningful upside.
Japanese Yen remains well supported by safe-haven buying, divergent BoJ-Fed expectations
- Tensions over trade tariffs heated up on Tuesday after China announced new special port fees for US ships arriving in Chinese ports. This comes on top of China’s enhanced restrictions on the export of rare earths and US President Donald Trump’s threat to raise tariffs on Chinese goods to 100%.
- Furthermore, Trump threatened to terminate trade with China in cooking oil and other products in response to China’s decision not to purchase US soybeans. This sparks concerns about a further escalation of the trade war between the world’s two largest economies and benefits safe-haven assets.
- Media reports suggest that Trump was considering sending the US-made Tomahawk long-range cruise missiles to Ukraine to pressure Russian President Vladimir Putin into negotiations. This keeps geopolitical risks in play and benefits the Japanese Yen during the Asian session on Wednesday.
- The latest vote to pass a Republican-backed stopgap funding bill to end the partial federal government shutdown fell short of the votes needed for passage in the Senate on Tuesday. This means that the shutdown, which started on October 1, will extend into a third week, with no resolution in sight.
- The long-standing Liberal Democratic Party (LDP)–Komeito coalition came to an abrupt end last week. The breakup, in turn, means the newly elected LDP leader, Sanae Takaichi, would need support from other parties to confirm her as Japan’s first female Prime Minister and for her key policies.
- Meanwhile, Kyodo news agency reported on Wednesday that Japan’s parliamentary scheduling committee could not agree on holding a vote to select the next Prime Minister on October 21.
- This might create a challenge for the Bank of Japan to hike interest rates and could act as a headwind for the JPY. However, traders are still pricing in the possibility of a further BoJ policy tightening this year. This marks a significant divergence in comparison to dovish Federal Reserve expectations.
- The CME Group’s FedWatch Tool indicates that traders have fully priced in that the US central bank will lower borrowing costs by a 25-basis-point in October and see a 90% chance for another rate reduction in December. This exerts pressure on the US Dollar and drags the USD/JPY pair lower.
USD/JPY bears now await sustained break below the 151.00 before positioning for further losses
This week’s repeated failures to rise above the 100-hour SMA and the subsequent decline below the 200-hour SMA, around the 151.20-151.15 region, could be seen as a key trigger for the USD/JPY bears. A sustained break and acceptance below the 151.00 mark will reaffirm the negative outlook and drag spot prices to the 150.70 intermediate support en route to the 150.00 psychological mark.
On the flip side, any intraday recovery beyond the 151.65-151.70 region might now confront an immediate hurdle near the 152.00 round figure. A further move up is likely to attract some sellers near the 152.25 area and remain capped near the 152.65-152.70 region. A sustained strength above the latter could shift the bias in favor of bullish traders and lift the USD/JPY pair beyond the 153.00 mark, towards retesting the eighth-month high, around the 153.25-153.30 region, touched last Friday.
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.
