Japanese Yen flickers as BoJ hawkish bets clash with political uncertainty, USD recovery

• The Japanese Yen struggles for a firm intraday direction amid mixed fundamental cues.

• BoJ rate hike bets support the JPY, though political crisis and positive risk tone cap gains.

• A further USD recovery acts as a tailwind for the USD/JPY pair ahead of US inflation data.

The Japanese Yen (JPY) is seen oscillating in a narrow trading band against its American counterpart during the Asian session on Wednesday amid mixed fundamental cues. Expectations that domestic political uncertainty could give the Bank of Japan (BoJ) more reasons to go slow on interest rate hikes, along with the upbeat market mood, undermine the safe-haven JPY. Apart from this, the overnight goodish US Dollar (USD) recovery on Tuesday assisted the USD/JPY pair to reverse an intraday decline back closer to the August monthly swing low.

The JPY bears, however, seem reluctant to place aggressive bets amid the growing acceptance that the BoJ will stick to its policy normalization path. In contrast, the US Federal Reserve (Fed) is expected to resume its rate-cutting cycle next week, which could act as a headwind for the USD. Furthermore, the divergent BoJ-Fed policy expectations could benefit the lower-yielding JPY and contribute to capping the USD/JPY pair. Traders might also opt to move to the sidelines ahead of the release of the US Producer Price Index (PPI) later this Wednesday.

Japanese Yen bears seem reluctant as hawkish BoJ expectations offset domestic political uncertainty

Japan's Prime Minister Shigeru Ishiba announced his decision to resign on Sunday in the wake of the Liberal Democratic Party’s defeat in the July upper house election. This adds a layer of uncertainty and could temporarily hinder the Bank of Japan from normalising policy.

Wall Street’s three major indices posted record closing highs on Tuesday, and the spillover effect led to a further rise in the Asian equity markets. This, in turn, undermines the safe-haven Japanese Yen, which, along with the ongoing US Dollar recovery, supports the USD/JPY pair.

The Reuters Tankan poll showed this Wednesday that Japanese manufacturers' sentiment was its best in more than three years in September. This follows an upward revision of Japan's GDP print earlier this week, which showed that the economy grew at an annualised 2.2% rate in Q2 2025.

Moreover, other upbeat data released recently pointed to a rise in household spending and positive real wages for the first time in seven months. This keeps the door open for an imminent BoJ rate hike by the year-end, which could hold back the JPY bears from placing aggressive bets.

This marks a significant divergence in comparison to rising bets for a more aggressive policy easing by the US Federal Reserve.  A 25-basis-points rate cut at the upcoming FOMC policy meeting next week is all but certain and traders are pricing in a small possibility of a jumbo rate cut.

The speculations were fueled by Friday's disappointing release of the US Nonfarm Payrolls (NFP) report, which pointed to signs of a softening labor market. This, in turn, might hold back the USD bulls from placing aggressive bets and act as a headwind for the USD/JPY pair.

Market participants now look to the release of the US Producer Price Index (PPI), due later during the North American session. The focus will then shift to the US Consumer Price Index (CPI) on Thursday, which will play a key role in influencing the near-term USD price dynamics.

USD/JPY technical setup warrants caution before positioning for any meaningful move higher

The overnight bounce from the 146.30 area, or the vicinity of the August monthly swing low, warrants some caution for the USD/JPY bears. That said, the lack of follow-through buying and negative oscillators on the daily chart suggest that the path of least resistance for spot prices remains to the downside. Hence, any further move up is more likely to attract fresh sellers near the 147.75-147.80 region, which, in turn, should cap the pair near the 148.00 round figure. A sustained strength beyond the latter might trigger a short-covering rally and pave the way for a move towards challenging the very important 200-day Simple Moving Average (SMA), currently pegged near the 148.75 zone.

On the flip side, the 147.00 round figure now seems to protect the immediate downside, below which the USD/JPY pair could slide back to the 146.30-146.20 strong horizontal support. Some follow-through selling, leading to a subsequent breakdown through the 146.00 mark, will be seen as a fresh trigger for bearish traders and drag spot prices to the 145.35 intermediate support en route to the 145.00 psychological mark.