The Japanese yen (JPY) is struggling against the strong US dollar (USD), recently dropping to its lowest level since February 12 during the Asian trading session on Tuesday. Investors seem to be uncertain about when the Bank of Japan might raise interest rates. The new Prime Minister, Sanae Takaichi, is expected to focus on a substantial fiscal spending plan while avoiding tightening measures. This reluctance, combined with a decrease in demand for safe-haven currencies, is significantly impacting the yen’s performance.
Bank of Japan Governor Kazuo Ueda, who expressed a more cautious tone last week, hinted he might consider raising interest rates in December or January. Speculation is also building around possible interventions from authorities to prevent further yen depreciation, which might make some bearish traders reconsider their strategies. Meanwhile, the dollar has reached its highest point since early August as traders adjusted their expectations for another rate cut by the US Federal Reserve in December, giving a boost to the USD/JPY exchange rate.
Japanese yen bears maintain control as uncertainty about Bank of Japan rate hike rises due to fiscal concerns
- Even though Japan’s Prime Minister Sanae Takaichi has indicated support for economic stimulus, the Bank of Japan is still hesitant about increasing interest rates, resulting in the yen remaining weak throughout Tuesday’s Asian session against the bullish US dollar.
- Data released last Friday indicated that the core consumer price index in Tokyo has stayed above the Bank of Japan’s 2% target for over three years, which could justify tighter policies from the central bank.
- Ueda emphasized last week that the likelihood of the base case scenario occurring is rising and reiterated that the Bank of Japan will adjust interest rates if the economic and price situations call for it.
- Additionally, the threat of potential currency interventions by Japanese authorities might limit further losses for the yen, although ongoing demand for USD continues to buoy the USD/JPY pair, which is nearing its highest since February.
- Last week, Federal Reserve Chairman Jerome Powell played a role in elevating the U.S. dollar index (DXY) to a three-month high, continuing its upward trajectory contrary to market predictions for further rate cuts in December.
- A U.S. government shutdown is anticipated to hit the 35-day mark on Tuesday night, making it the longest in 2019 as lawmakers remain at an impasse over funding bills.
- Senate Majority Leader John Thune expressed optimism that the shutdown could end this week, with the Senate planning to vote again later on Tuesday on a Republican-supported funding bill that passed the House.
- Investors are increasingly worried that a prolonged shutdown may harm the economy, thus it’s prudent to be cautious about potential extended strength for the USD and further increases in the USD/JPY ratio.
USD/JPY looks poised to rise further towards recovery of the psychological mark of 155.00
Technically speaking, last week’s breach of the 153.25-153.30 resistance followed by strength above the 154.00 level has been significant for USD/JPY bulls. Moreover, the daily chart’s oscillator is still comfortably in positive territory and hasn’t reached overbought levels yet, supporting a possible move towards recovering the psychological barrier of 155.00, aiming to clear the 154.75-154.80 intermediate resistance.
On the downside, a corrective pullback seems to be finding support around the 154.00 level and 153.65, which is just above last Friday’s swing low. After that, the 153.00 mark—previously resistance at 153.30-153.25—could serve as support, where a decisive breakout might expose the 152.15 area. Continuous selling below 152.00 could undermine the positive short-term outlook and pull the USD/JPY pair down toward the 151.55-151.50 range, heading toward crucial support around 151.10-151.00.
(This message was corrected at 3:19 a.m. Japan time to clarify that the Japanese yen has fallen, not risen, and was not at its highest since February 12.)
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is among the most traded currencies worldwide. Its value is influenced by Japan’s economic trends but is also shaped by factors like the Bank of Japan’s policies, the difference in bond yields between Japan and the U.S., and the market’s risk appetite.
The Bank of Japan’s role includes managing exchange rates, making its trends vital for the yen. It occasionally intervenes in currency markets, primarily to devalue the yen, though infrequently due to diplomatic concerns with key trading partners. The ultra-easy policy from 2013 to 2024 expanded the gap between its policies and those of other major central banks, which has led to a weaker yen against major currencies. Recently, the gradual reduction of this ultra-loose policy has provided some support for the yen.
Over the last decade, the Bank of Japan’s persistent ultra-easy monetary approach has deepened its policy divergence from other central banks, especially the U.S. Federal Reserve. This has confirmed the growing gap between Japanese and U.S. 10-year bonds, favoring the dollar over the yen. However, this gap is closing with the Bank of Japan’s recent decision to gradually ease its ultra-easy policy and other major central banks cutting interest rates.
The Japanese yen is often regarded as a safe investment. Therefore, during market turmoil, investors tend to flock to the yen, viewing it as a stable and reliable currency. Economic distress usually enhances the yen’s value against other currencies perceived as riskier.
