Japanese Yen struggles amid Oil rally, fiscal concerns

• USD/JPY gains 0.28% on Monday, supported by a stronger US Dollar and persistent weakness in the Japanese Yen.
• Rising Oil prices, fueled by geopolitical tensions in the Middle East and Ukraine, put further pressure on the Japanese currency.
• Concerns over Japan's public finances limit the Japanese Yen's recovery, despite expectations of further interest rate hikes.

USD/JPY extends its advance on Monday, gaining 0.28% on the day to trade around 158.70 at the time of writing. The pair benefits from a stronger US Dollar (USD), supported by rising Oil prices and persistent geopolitical tensions, while the Japanese Yen (JPY) remains under pressure amid concerns over Japan's public finances.

The US Dollar Index (DXY), which measures the Greenback's performance against a basket of six major currencies, climbs above 102.50 on Monday, reaching its highest level since April 2025. The advance comes as Oil prices resume their upward trajectory following the apparent failure of efforts to halt attacks on energy infrastructure in Russia and Ukraine.

On Friday, US President Donald Trump announced that Moscow and Kyiv had agreed to suspend strikes on each other's energy facilities. The announcement initially pushed Oil lower when markets reopened. However, Russian attacks continue, with Ukrainian President Volodymyr Zelenskyy reporting on Monday that six Ukrainian energy facilities had been targeted.

Meanwhile, tensions in the Middle East continue to fuel concerns over global Oil supplies. Iran's Revolutionary Guards claim to have set a third supertanker on fire in the Strait of Hormuz in two days, triggering another surge in Oil prices.

The surge in energy prices weighs particularly on Japan, which relies heavily on Oil imports. As these imports are primarily priced in US Dollars, higher Crude Oil prices increase Japanese importers' demand for foreign currency, potentially strengthening demand for the Greenback at the expense of the Japanese Yen.

Beyond energy-related pressures, the Japanese currency remains vulnerable to concerns over Prime Minister Sanae Takaichi's expansionary fiscal policies. The prospect of increased government spending, against a backdrop of already elevated sovereign debt, is fueling worries about the sustainability of Japan's public finances and limiting the Japanese Yen's ability to strengthen.

However, expectations of further interest rate hikes by the Bank of Japan (BoJ) could help limit the Japanese currency's depreciation. BoJ Governor Kazuo Ueda recently emphasized that monetary policy is shifting toward a more preemptive approach to inflation risks, rather than focusing exclusively on achieving the 2% inflation target.

Furthermore, Japanese real wages have increased for the eighth consecutive month, strengthening the case for continued monetary policy normalization. Sustained wage growth could support domestic consumption and allow the BoJ to consider additional interest rate hikes, potentially providing some support for the Japanese Yen.

Against this backdrop, USD/JPY remains supported by US Dollar strength and Japanese fiscal concerns, while the prospect of further monetary tightening by the BoJ could help limit additional Japanese Yen weakness.

USD/JPY technical analysis

In the one-hour chart, USD/JPY trades at 158.71, maintaining a bullish intraday bias as it holds comfortably above its major moving averages. The 100-period simple moving average (SMA) at 158.21 and the 200-period SMA at 158.03 sit well below spot, suggesting a constructive underlying trend, while nearby horizontal support at 158.45 underpins the latest advance. The Relative Strength Index (14) hovers around 70, signaling overbought conditions and hinting that upside momentum is stretched even as buyers remain in control.

On the topside, initial resistance is located at the 159.00 horizontal barrier, where a sustained break would open the way for further gains. On the downside, immediate support is seen at 158.45, followed by the 100-period SMA at 158.21 and the 200-period SMA at 158.03; a deeper pullback would expose the next horizontal floors at 157.85, 157.00, 156.50 and 155.50.

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