Japanese Yen drops to fresh one-year low vs. USD amid BoJ uncertainty, election risks
- Japanese Yen extends its descending trend and is pressured by a combination of factors.
- BoJ uncertainty, Japan-China rift, and talks of a snap election in Japan undermine the JPY.
- Intervention fears might cap USD/JPY amid a subdued USD, ahead of the US CPI report.
The Japanese Yen (JPY) continues its relative underperformance amid speculation that Prime Minister Sanae Takaichi may soon call a snap election to take advantage of strong approval ratings. With Takaichi's popularity running high, a win would likely cement her authority to further boost the expansionary fiscal policy. These expectations lifted Japan’s Nikkei 225 to a record high and undermined the JPY's safe-haven status. Apart from this, the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) and the deepening Japan–China diplomatic crisis turned out to be other factors weighing on the JPY.
The aforementioned fundamental backdrop drags the JPY to a fresh one-year low against its American counterpart during the Asian session on Tuesday. However, speculations that Japanese authorities will step in to stem further weakness in the domestic currency might hold back the JPY bears from placing fresh bets. The US Dollar (USD), on the other hand, struggles to attract any meaningful buyers amid concerns about the US Federal Reserve's (Fed) independence, which might contribute to capping the USD/JPY pair. Traders now look forward to the release of the latest US consumer inflation figures for a fresh impetus later today.
Japanese Yen bears retain control amid BoJ rate hike doubts, political uncertainty
- Reports suggest that Japan's Prime Minister Sanae Takaichi may call an early election in the first half of February to bolster her coalition government’s parliamentary majority, fueling hopes for additional stimulus.
- Last week, China prohibited 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.
- Despite the Bank of Japan's (BoJ) hawkish outlook, investors remain uncertain about the likely timing of the next rate hike. This, along with the risk-on impulse, is seen undermining demand for the safe-haven Japanese Yen.
- Japan’s Finance Minister Satsuki Katayama said this Tuesday that she shared concerns over the JPY's recent one-sided decline with US Treasury Secretary Scott Bessent and added that the tolerance for weakness was limited.
- Concerns about the Federal Reserve's independence resurfaced on Monday after prosecutors opened a criminal investigation against Jerome Powell over his testimony about the central bank building renovation project.
- Powell, in a rate statement, called the probe unprecedented and said that he believed it was opened due to US President Donald Trump's anger over the Fed's refusal to cut interest rates despite repeated public pressure.
- This keeps the US Dollar bulls on the defensive despite firming expectations for a less aggressive monetary policy easing by the US central bank this year, bolstered by the latest monthly employment details released last Friday.
- Traders are pricing in the possibility of two more rate cuts by the Fed in 2026. This marks a significant divergence compared to expectations that the BoJ will stick to its policy normalization path and should cap the USD/JPY pair.
- 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.
- Investors might also refrain from placing aggressive directional bets and opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain glued to the release of the latest US consumer inflation figures.
USD/JPY technical setup backs the case for a further near-term appreciating move
The 50-day Simple Moving Average (SMA) continues to rise, with the USD/JPY pair holding above it, reinforcing a firm bullish bias. The SMA, around the 156.00 mark, offers nearby dynamic support as buyers retain control. The Moving Average Convergence Divergence (MACD) shows a bullish crossover near the zero line, with the histogram turning positive and momentum improving.
The Relative Strength Index (RSI) stands at 67.47, strong but not overbought, supporting the upside while leaving room before stretched conditions emerge. As long as USD/JPY holds above its rising SMA, pullbacks would remain contained, and the pair could extend higher; a close back below the average would hint at waning momentum and a move into consolidation.
(The technical analysis of this story was written with the help of an AI tool.)
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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