Japanese Yen weakens to fresh low since early August against USD on fiscal easing bets
- The Japanese Yen weakens further amid bets that Takaichi's policies could delay BoJ rate hikes.
- The recent record-setting run in equity markets also undermines demand for the safe-haven JPY.
- Fed rate cut bets and the US government shutdown act as a headwind for the USD and USD/JPY.
The Japanese Yen (JPY) adds to the previous day's heavy losses and slides to a fresh low since early August against its American counterpart during the Asian session on Tuesday. An unexpected result from Japan’s leadership contest sets the country on course for more expansionary fiscal policies, which could further complicate the Bank of Japan's (BoJ) task. Traders were quick to react and started pricing out the possibility of an interest rate hike by the BoJ later this month, which continues to undermine the JPY.
Meanwhile, the optimism lifts Japan's Nikkei 225 to a fresh record high and turns out to be another factor driving flows away from the safe-haven JPY. However, data released earlier today, Household Spending in Japan rose at a faster pace than expected in August, which backs the case for a further policy tightening by the BoJ and helps limit deeper JPY losses. The US Dollar (USD), on the other hand, struggles to lure buyers amid dovish Federal Reserve (Fed) expectations and might contribute to capping the USD/JPY pair.
Japanese Yen retains a negative bias as Takaichi's win spurs bets for fiscal easing and delayed BoJ rate hikes
- The Internal Affairs Ministry reported earlier this Tuesday showed that Household Spending in Japan rose for the fourth consecutive month, by 2.3% from a year earlier. The data backs the Bank of Japan's plans to keep raising interest rates despite a fiscal dove Sanae Takaichi's win at the Liberal Democratic Party (LDP) leadership election on Saturday.
- Takaichi stood out in the race as the only supporter of big spending and is expected to be confirmed as Japan's first female Prime Minister during a parliamentary session in mid-October. Expectations for more expansionary economic policies could complicate the BoJ's task, which, in turn, continues to exert downward pressure on the Japanese Yen.
- The Nasdaq and the S&P 500 registered fresh record closing highs on Monday ahead of third-quarter earnings next week, which could act as a fresh catalyst for investors. Moreover, Japan's Nikkei 225 index touches a fresh record high amid expectations for more expansionary economic policies and further undermines the safe-haven JPY.
- Meanwhile, the US Dollar regains some positive traction following the previous day's late pullback from the vicinity of the late September swing high. This turns out to be another factor that contributes to the USD/JPY pair's move up to its highest level since early August. The USD bulls, however, lack conviction amid dovish Federal Reserve expectations.
- According to the CME FedWatch tool, the possibility of a 25-basis-point interest rate cut by the US Federal Reserve in October and December stands at around 95% and 84%, respectively. Furthermore, concerns that a prolonged US government shutdown could potentially disrupt economic activity act as a headwind for the USD and the USD/JPY pair.
- In fact, the US federal government remained shuttered for the sixth consecutive day on Monday, with the Senate closing its session without reaching a consensus on a spending bill. Democrats had repeatedly rejected a Republican-backed spending bill and have been calling for the continuation of healthcare subsidies for millions of Americans.
- Traders now look to speeches from influential FOMC members this week, including Fed Chair Jerome Powell's appearance on Thursday. Apart from this, the FOMC meeting minutes on Wednesday could offer more cues on interest rate cuts amid growing risks to the US economy. This, in turn, will drive the USD and the USD/JPY pair.
USD/JPY seems poised to appreciate further and test the August monthly swing high, around 151.00
The overnight breakout through the 150.00 psychological mark comes on top of last week's rebound from the 100-day Simple Moving Average (SMA) support and favors the USD/JPY bulls. Moreover, oscillators on the daily chart are holding in positive territory and are still away from being in the overbought territory, suggesting that the path of least resistance for spot prices is to the upside. Hence, some follow-through strength towards testing the August swing high, around the 151.00 neighborhood, looks like a distinct possibility. A subsequent strength beyond the said handle should pave the way for a further near-term appreciating move.
On the flip side, corrective pullbacks might now find decent support below the 150.00 mark. Any further slide could be seen as a buying opportunity near the 149.40 area, which should help limit the downside for the USD/JPY pair near the 149.00 mark. A convincing break below the latter could drag spot prices to the next relevant support near the 148.35 region en route to the 148.00 round figure and the 147.80 zone. Failure to defend the said support levels might shift the near-term bias in favor of bearish traders.
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.
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