The Japanese Yen stalls the overnight recovery from a two-week low against the USD.Domestic political uncertainty and a positive risk tone undermine the safe-haven JPY.The divergent BoJ-Fed policy expectations act as a tailwind for the lower-yielding JPY.
The Japanese Yen (JPY) oscillates in a narrow band against its American counterpart during the Asian session on Tuesday and, for now, seems to have stalled the previous day’s recovery from a two-week low. Investors remain concerned that domestic political uncertainty and economic headwinds stemming from US tariffs could give the Bank of Japan (BoJ) more reasons to further delay an increase in borrowing costs. This is holding back the JPY bulls from placing aggressive bets. Furthermore, the prevalent risk-on mood – as depicted by a generally positive tone around the equity markets – turns out to be another factor acting as a headwind for the safe-haven JPY.
Meanwhile, hawkish dissents to the Bank of Japan’s (BoJ) on-hold decision last week could be a prelude to impending rate hikes. This marks a significant divergence in comparison to the US Federal Reserve’s (Fed) dovish outlook, signaling two more rate cuts by the end of this year, which, in turn, could limit the downside for the lower-yielding JPY. The US Dollar (USD), on the other hand, attracts some dip-buyers following the overnight pullback from a one-week high and offers some support to the USD/JPY pair ahead of Fed Chair Jerome Powell’s speech.
Japanese Yen bulls seem non-committed despite supportive fundamental backdropA Liberal Democratic Party (LDP) leadership election will take place on 4 October, and the outcome could affect the likely timing of the next rate hike by the Bank of Japan if a candidate with dovish views is selected.Shinjiro Koizumi, seen as a frontrunner in the ruling party’s leadership race, said that the government must be mindful of the need for fiscal discipline, but achieving solid economic growth is the basis for guiding sound fiscal policy.Separately, Japan’s Prime Minister contender, Yoshimasa Hayashi, said that the government must avoid issuing deficit-covering bonds to fund spending. Furthermore, Sanae Takaichi noted that the government should be mindful of the risk of causing yield rise in guiding fiscal policy.Wall Street indices have hit a series of record highs since last week, and the spillover effect leads to a further rise in Asian stocks. This, in turn, keeps a lid on the safe-haven Japanese Yen during the Asian session on Tuesday.There were two dissents to the BoJ’s decision to leave the interest rate unchanged at 0.5%. Moreover, BoJ Governor Kazuo Ueda showed readiness to hike rates further if the economy and prices moved in line with forecasts.Investors are now pricing a greater chance of a 25 basis point BoJ rate hike in October amid signs of economic resilience. This marks a significant divergence in comparison to the Federal Reserve’s dovish outlook.The US central bank lowered borrowing costs last Wednesday for the first time since December and signaled that more interest rate cuts would follow through by the year-end amid signs of a softening labor market.Traders now believe that interest rates will drop much faster than the Fed is planning and are betting on the possibility that the short-term rate, currently in the 4.00%-4.25% range, will fall under 3% by the end of 2026.NATO countries have accused Russia of violating the airspace of alliance members Estonia, Poland, and Romania. Russia, however, rejected the claims and accused the European powers of levying baseless accusations.Despite recent diplomatic efforts to find ways to end the more than three-year war, fighting has intensified in recent months. In fact, Russia and Ukraine accused each other of deadly drone strikes on civilian areas on Monday.Hamas escalated its attacks and launched multiple rockets on Israel amid the intensifying attacks by the Israeli Defense Forces inside Gaza City. This keeps geopolitical risks in play and could benefit the safe-haven JPY.Traders now look forward to Fed Chair Jerome Powell’s scheduled speech later during the North American session, which will influence the USD price dynamics and provide some meaningful impetus to the USD/JPY pair.In the meantime, the flash PMIs could offer some insight into the global economic health, which, in turn, would play a key role in driving the broader risk sentiment and demand for the traditional safe-haven JPY.The focus, however, would be on two key inflation figures from Japan’s capital city, Tokyo, and the US Personal Consumption Expenditure (PCE) Price Index, due for release during the latter part of the week, on Friday.USD/JPY could face hurdle near 148.00 ahead of the 148.35-148.40 zone
The USD/JPY pair could find some support near last Friday’s post-BoJ swing low, around the 147.20 zone. This is followed by the 147.00 mark, below which spot prices could accelerate the fall towards the 146.20 horizontal support. The downward trajectory could extend further towards the 145.50-145.45 region, or the lowest level since July 7, touched last Wednesday.
On the flip side, the 148.00 round figure could act as an immediate hurdle ahead of the 148.35-148.40 region, or a two-week high touched on Monday, and the very important 200-day Simple Moving Average (SMA), around the 148.55 area. Some follow-through buying could lift the USD/JPY pair to the 149.00 mark en route to the monthly high, around the 149.15 area.
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.
AloJapan.com