The Japanese yen (JPY) is facing difficulty capitalizing on a minor rebound against the generally weaker US dollar (USD) as traders navigate the political landscape in Japan. Reports indicate that Japan’s ruling Liberal Democratic Party (LDP) and Japan Ishin no Kai (JIP) have reached an agreement to establish a coalition government. This development paves the way for Sanae Takaichi to potentially become the first female prime minister of Japan, which has sparked speculation about increased government spending and a lenient monetary policy, leading to a noticeable decline in the yen’s value throughout the day.
However, this new coalition remains fragile and holds a minority position, requiring additional support from various opposition groups to enact any legislation. Moreover, recent statements from Bank of Japan (BOJ) officials indicate a commitment to normalizing policies, which might gradually attract buyers for the yen at lower prices. In the meantime, the U.S. dollar is struggling to find buyers, largely due to expectations of two more rate cuts from the U.S. Federal Reserve in 2025. This context has contributed to a decline of around 75 pips in the USD/JPY pair.
Political uncertainty weighs on Japanese Yen traders
- Kyodo News has reported that the LDP and Nippon Ishin no Kai, often simply called Ishin, are set to formalize their cooperative agreement on Monday. The coalition is expected to elect Sanae Takaichi as the first female prime minister in the Diet on Tuesday.
- Takaichi is in favor of former Prime Minister Shinzo Abe’s economic strategies, which advocated for significant spending and financial stimulus to boost the economy. Her stance could lean towards opposing any further tightening of policies from the Bank of Japan, potentially putting additional pressure on the yen.
- Global trade uncertainty might lead the Bank of Japan to maintain its current stance in the upcoming meeting. However, BOJ Deputy Governor Shinichi Uchida mentioned recently that if economic conditions continue as predicted, the central bank would still consider raising interest rates.
- Interestingly, Japan’s inflation has been above the Bank of Japan’s 2% target for over three years now, and the economy has shown growth for five consecutive quarters up to June. This situation opens the possibility for the BOJ to increase rates in December or January.
- On the flip side, traders are fully anticipating the Federal Reserve to implement a 25 basis point rate cut in October and December, according to CME Group’s FedWatch tool. This could hinder any gains from the previous day’s rise of the U.S. dollar, possibly lending support to the low-yielding yen.
- The U.S. government shutdown has now lasted for 20 days, with the Senate gearing up for an 11th vote on the temporary funding bill as disagreements between Democrats and Republicans continue. This situation may help cap the appreciation of the USD/JPY pair.
For bears to regain control, USD/JPY must drop below the 150.00 threshold.
The recent upward movement has driven spot values above the 38.2% Fibonacci retracement level from the latest decline observed since the monthly peak. Additionally, positive indicators on the hourly and daily charts suggest the potential for further upward movement towards the 151.75 level, which coincides with a 61.8% Fibonacci retracement and a 200-hour simple moving average (SMA). If prices sustain above this point, the USD/JPY pair could rise above 152.00, aiming for the next significant resistance near the 152.25 zone and eventually 153.00.
On the other hand, the 150.50-150.45 range seems to be protecting immediate downside risks past the 150.25 area, or the 23.6% Fibonacci retracement level, along with the psychological threshold of 150.00. A decisive drop below this mark could open the door to the 149.40-149.35 area, perhaps even reaching Friday’s nearly two-week low. Further declines could push the USD/JPY pair down to the round figure of 149.00 before finding support at strong horizontal resistance situated around 148.45-148.40.
FAQs about the Japanese Yen
The Japanese Yen (JPY) is among the most widely traded currencies globally. Its value is primarily influenced by Japan’s economic trends, along with factors like the Bank of Japan’s monetary policies, the yield disparities between Japanese and U.S. bonds, and overall traders’ sentiment towards risk.
One of the Bank of Japan’s roles involves managing exchange rates, making its actions crucial for the yen’s stability. Occasionally, the Bank intervenes in currency markets to devalue the yen, but it refrains from doing so often due to political considerations with major trading partners. The long-standing ultra-easy policy from 2013 to 2024 has led to a divergence in monetary policy compared to other major central banks, causing the yen to weaken against others. Recently, the gradual easing of this approach has provided some support for the yen.
Over the past ten years, the Bank of Japan’s commitment to an ultra-easy monetary policy has caused a significant gap between its policies and those of other central banks, especially the U.S. Federal Reserve. This has reaffirmed the widening disparity between U.S. 10-year bonds and their Japanese counterparts, favoring the dollar. Nevertheless, as the Bank of Japan gradually steps away from this ultra-easy stance in 2024 and other major central banks cut rates, the gap could start to narrow.
The Japanese yen is frequently regarded as a safe-haven asset. Hence, during market turmoil, investors often turn to the yen, viewing it as a stable and reliable currency. In times of unrest, this tendency tends to elevate the yen’s value compared to riskier currencies.
