The Japanese yen (JPY) held steady against the US dollar for the second consecutive day on Wednesday, yet there’s a noticeable lack of bullish enthusiasm given the mixed economic signals. Various factors, including shifting U.S.-China trade relations, geopolitical tensions, and fears of a prolonged U.S. government shutdown, are fueling demand for safe-haven currencies like the yen. Additionally, recent remarks from Finance Minister Katsunobu Kato have heightened speculation regarding potential government actions to curb further depreciation of the yen.
In other news, the coalition government between the Liberal Democratic Party and Komeito ended unexpectedly last Friday, just ahead of an October 20 deadline to confirm Sanae Takaichi as Japan’s first female prime minister. This development may heighten uncertainty and push the Bank of Japan (BOJ) to postpone interest rate hikes, which could deter yen bulls from making fresh investments. On the flip side, the US dollar (USD) appears to struggle in attracting buyers amid dovish sentiments from the Federal Reserve, likely limiting any positive movement in the USD/JPY exchange rate.
Japanese yen attracts buyers as global safe haven offsets Japan’s political crisis
- Trade tensions rose on Tuesday when China announced new special port fees for U.S. vessels. This follows China’s stricter export controls on rare earth materials and US President Donald Trump’s threat to implement a 100% tariff on Chinese imports.
- President Trump also hinted at stopping trade with China over certain products, like cooking oil, in response to China’s refusal to purchase U.S. soybeans. This raises alarms about an escalating trade war between these two major economies, ultimately benefiting safe-haven assets.
- Reports suggest that President Trump is considering sending U.S.-made Tomahawk missiles to Ukraine, aiming to pressure Russian President Vladimir Putin into talks. Geopolitical risks like these continue to provide support for the yen during Wednesday’s Asian trading session.
- The recent vote for a Republican-backed stopgap funding bill to resolve the partial federal government shutdown did not pass in the Senate. Thus, the shutdown, which began on October 1, extends into a third week with an unclear resolution ahead.
- The sudden collapse of the coalition government means that the newly elected leader of the Liberal Democratic Party, Sanae Takaichi, will likely become Japan’s first female prime minister. She’ll require support from other political factions to push her critical policies forward.
- This situation might challenge the Bank of Japan regarding interest rate hikes, possibly acting as a headwind for the yen. Nevertheless, traders are still considering the likelihood that the BOJ will tighten monetary policy later this year, a sharp contrast to the dovish expectations surrounding the Federal Reserve.
- Traders are anticipating a 25 basis point cut in U.S. borrowing costs in October, and a 90% chance of another cut in December, as per CME Group’s FedWatch tool. This adds pressure on the US dollar and contributes to a decline in the USD/JPY exchange rate.
If USD/JPY falls below the 200-hour SMA (around 151.20 to 151.15), the decline may accelerate.
A failure to consistently break above the 100-hour SMA this week, along with subsequent drops, indicate a bearish trend for USD/JPY. However, a positive oscillator on the daily chart implies there may be some support near the 200-hour SMA around 151.20. If the rate drops below this, it could lead towards 151.00, followed by intermediate support levels at 150.70 and the psychological barrier at 150.00.
On the other hand, a short-term recovery above the 151.65-151.70 range could encounter resistance near the 152.00 mark. A continued rise may attract sellers around 152.25 and maintain a ceiling near 152.65-152.70. Sustained strength above this latter area could change the outlook for bullish traders, pushing USD/JPY past the 153.00 level and revisiting last Friday’s eight-month highs around 153.25-153.30.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) ranks among the most traded currencies worldwide. Its value tends to be influenced not only by the overall direction of Japan’s economy but also by factors such as the Bank of Japan’s policies, differences in bond yields between Japan and the U.S., and the general sentiment of traders regarding risk.
One of the primary roles of the Bank of Japan is to manage exchange rates, making its activities crucial for the yen. Occasionally, the Bank intervenes in currency markets to weaken the yen, although this is infrequent due to political sensitivities regarding major trading partners. The ultra-easy monetary policy implemented from 2013 to 2024 led to a widening gap between the Bank of Japan’s policies and those of other major central banks, causing the yen to weaken. However, recent gradual easing of this ultra-easy approach has begun to offer some support for the yen.
Over the last ten years, the Bank of Japan’s commitment to ultra-easy monetary policy has led to a significant disparity compared to other central banks, particularly the US Federal Reserve. This has confirmed an increasing gap between the yields of US 10-year bonds and Japan’s 10-year bonds, favoring the US dollar over the yen. This gap has been narrowing recently due to the BOJ’s decision to gradually end its ultra-easy policies alongside interest rate cuts initiated by other major central banks.
The Japanese yen is often viewed as a safe currency. During times of market stress, investors tend to shift towards the yen, expecting it to be stable and reliable. Thus, periods of turmoil typically enhance the yen’s value against riskier currencies.
