The Japanese Yen (JPY) attracts heavy selling for the third consecutive day on Wednesday, which, along with a broadly firmer US Dollar (USD), lifts the USD/JPY pair to its highest level since February, around the 152.65 area during the Asian session. Investors now seem worried that more expansionary fiscal policy from Japan’s incoming first female Prime Minister, Sanae Takaichi, could further complicate the task facing the Bank of Japan (BoJ). Moreover, Takuji Aida, who is considered among Takaichi’s closest advisers on economic policy, said that a move by the BoJ to raise interest rates this month would be too early. This, in turn, is seen as a key factor that continues to weigh on the JPY.
Takuji, however, reaffirmed market expectations for a further policy tightening by the BoJ and said that Takaichi will tolerate another 25 bps interest rate hike by January if the economy is in firm shape. This marks a significant divergence in comparison to rising bets that the US Federal Reserve (Fed) will lower borrowing costs two more times this year. This, along with concerns about a prolonged US government shutdown, could act as a headwind for the USD. Furthermore, the divergent BoJ-Fed policy outlooks could benefit the lower-yielding JPY and contribute to capping the USD/JPY pair. Traders now look to the FOMC Minutes, due later today, for rate-cut cues and some meaningful impetus.
Japanese Yen selling remains unabated amid fading BoJ rate hike hopesSanae Takaichi’s surprise win in the ruling Liberal Democratic Party’s (LDP) leadership race on Saturday fueled speculations of more stimulus. This, in turn, forced investors to scale back their expectations for a Bank of Japan (BoJ) interest rate hike this month and dragged the Japanese Yen for the third straight day on Wednesday.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. Moreover, two out of the nine BoJ board members voted against keeping the interest rate on hold last month, citing still sticky inflationary pressures.Takuji Aida – one of Takaichi’s closest economic advisers – said that a 25-basis-point interest rate hike in January would be on condition the BoJ maintains relatively loose monetary policy with no further rate hikes likely until 2027. Nevertheless, this keeps hopes alive for another interest rate hike by the BoJ early next year.This marks a significant divergence in comparison to rising bets for two rate reductions by the US Federal Reserve in October and December . The US Dollar, however, seems unaffected by dovish Fed expectations and climbs to its highest level since late August, contributing to the USD/JPY pair’s momentum.The US government shutdown enters its second week with very few signs of progress toward a deal as Republicans and Democrats remain committed to their positions. A prolonged US government closure could affect the economic performance, and any furloughing of federal workers presents risks for the labor market.The market focus now shifts to the release of FOMC Minutes later this Wednesday. Apart from this, Fed Chair Jerome Powell’s appearance on Thursday could offer more cues on interest rate cuts. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh impetus to the USD/JPY pair.USD/JPY seems poised to build on intraday breakout through the 152.00 mark
The overnight breakout through the 151.00 horizontal barrier and a subsequent strength beyond the 152.00 mark could be seen as a fresh trigger for the USD/JPY bulls. That said, the daily Relative Strength Index (RSI) has moved close to the overbought territory, making it prudent to wait for some near-term consolidation or a modest pullback before positioning for further gains. Any corrective slide, however, could find some support near the 152.00 round figure ahead of the Asian session low, around the 151.75 region, and the 151.00 mark. The latter should act as a strong near-term base for spot prices, which, if broken, could pave the way for deeper losses.
Nevertheless, the USD/JPY pair seems poised to prolong its uptrend towards the 153.00 mark en route to the next relevant hurdle near the 153.25-153.30 region. The momentum could extend further beyond the 153.70 intermediate hurdle as bulls aim to conquer the 154.00 mark for the first time since February.
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.
AloJapan.com