Japanese Yen bulls seem hesitant as political and BoJ doubts offset flight to safety

• The Japanese Yen attracts some safe-haven flows on Monday amid rising geopolitical risks.
• Reports that Japan's Takaichi may call an early election and the BoJ uncertainty cap the JPY.
• Concerns about the Fed’s independence weigh on the USD and cap the upside for USD/JPY.

The Japanese Yen (JPY) recovers slightly after touching a fresh one-year low against a broadly weaker US Dollar (USD) during the Asian session on Monday. The global risk sentiment takes a hit amid concerns about further escalation of geopolitical tensions, which, in turn, is seen driving some safe-haven flows toward the JPY. The USD, on the other hand, is pressured by growing concerns about the Federal Reserve's (Fed) independence, which offsets reduced bets for more aggressive policy easing this year, and exerts pressure on the USD/JPY pair.

However, a deepening Japan-China rift and reports that Japan's Prime Minister Sanae Takaichi may call an early general election add a layer of uncertainty amid the lack of clarity about the likely timing of the next Bank of Japan (BoJ) interest rate hike. This might hold back the JPY bulls from placing aggressive bets and help limit the downside for the USD/JPY pair. Moreover, traders might opt to wait for the release of the latest US inflation figures – the Consumer Price Index (CPI) and the Producer Price Index (PPI), due on Tuesday and Wednesday, respectively.

Japanese Yen bears have the upper hand amid reports of snap elections in Japan and BoJ rate-hike doubts

• US President Donald Trump told reporters on Sunday that he was considering a range of options, including potential military action, in response to the unrest in Iran. The latter threatened to target US military bases if Trump carries out threats to intervene on behalf of protesters.
• This comes on top of the intensifying Russia-Ukraine war and tempers investors' appetite for riskier assets, lending some support to the safe-haven Japanese Yen at the start of a new week. However, a combination of factors holds back traders from placing aggressive JPY bullish bets.
• Last week, China prohibited dual-use goods, including some rare earth elements, from being exported to Japan with immediate effect. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers, which could act as a headwind for the JPY.
• The Yomiuri newspaper reported on Friday that Japan's Prime Minister Sanae Takaichi was considering holding a snap parliamentary election in the first half of February. Adding to this, the uncertainty over the timing of the next Bank of Japan interest rate hike could cap the JPY.
• The US Dollar, on the other hand, attracts heavy selling amid growing worries about the US Federal Reserve's independence and moves away from its highest level since December 5, touched on Friday. This further contributes to the USD/JPY pair's Asian session slide to mid-157.00s.
• Fed Chair Jerome Powell said that the Department of Justice is threatening a criminal indictment against him. Powell added that the threat of criminal charges is a consequence of the Fed, based on its best assessment of what will serve the public, rather than following the preference of the President.
• On the economic data front, the US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls rose by 50K in December, below expectations for a reading of 60K and November's 56K (revised from 64K). However, the Unemployment Rate fell to 4.4% from 4.6% in November.
• This led to a shift in the likelihood of a Fed rate cut at the next policy meeting on January 28, though it failed to impress the USD bulls. Nevertheless, the Fed is still expected to lower borrowing costs further this year, which marks a significant divergence compared to hawkish BoJ bets.
• In fact, BoJ Governor Kazuo Ueda reiterated last week that the central bank would continue to raise interest rates if economic and price developments move in line with forecasts, leaving the door open for further policy tightening. This, in turn, caps the upside for the USD/JPY pair.
• Traders now look forward to the release of the latest US inflation figures – the Consumer Price Index (CPI) and the Producer Price Index (PPI) on Tuesday and Wednesday, respectively. This would influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair.

USD/JPY could appreciate further while above mid-157.00s; slightly overbought RSI warrants caution for bulls

The 200-period Simple Moving Average (SMA) on the 4-hour chart nudges higher at 156.14, with the USD/JPY pair holding above it to preserve a bullish bias. As a slower trend gauge, the rising SMA underscores underlying demand. The Moving Average Convergence Divergence (MACD) line stands above the Signal line and above zero, while the histogram remains positive, suggesting firm upside momentum. The Relative Strength Index (RSI) prints at 75 (overbought), pointing to stretched conditions that could cap immediate gains.

Price remains supported by the rising 200-period SMA, and a sustained hold above that average would keep buyers in control. MACD’s positive alignment reinforces the bullish tone. With RSI above 70, any dip could be a pause to unwind overbought readings before the trend resumes. Failure to maintain the SMA base would open room for a corrective pullback.

(The technical analysis of this story was written with the help of an AI tool)