Japanese Yen remains depressed amid political chaos, BoJ uncertainty and positive risk tone
- The Japanese Yen is pressured by bets that political uncertainty could delay BoJ rate hikes.
- Easing fears of a US-China trade war are also seen as undermining the JPY’s safe-haven status.
- The USD preserves the previous day’s gains and further lends support to the USD/JPY pair.
The Japanese Yen (JPY) drifts lower for the second consecutive day on Tuesday amid expectations that domestic political chaos could further delay the Bank of Japan's (BoJ) rate hike plans. Apart from this, the upbeat market mood is seen undermining the JPY's safe-haven status. This, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in building on the overnight gains and climbing back above mid-152.00s during the Asian session.
Meanwhile, traders are still pricing in the possibility of an imminent BoJ interest rate hike by the end of this year. This marks a significant divergence in comparison to the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times in 2025. The latter could act as a headwind for the USD. Moreover, the divergent BoJ-Fed policy expectations could offer some support and limit losses for the lower-yielding JPY.
Japanese Yen bears have the upper hand amid BoJ rate hike uncertainty, upbeat market mood
- The long-standing Liberal Democratic Party (LDP)–Komeito coalition came to an abrupt end last week, as the newly elected LDP leader, Sanae Takaichi, awaits a parliamentary vote to confirm her as Japan’s first female Prime Minister. The breakup, in turn, means Takaichi would need support from other parties for her key policies.
- Nevertheless, the heightened political uncertainty might create a challenge for the Bank of Japan to hike interest rates further and continue to undermine the Japanese Yen. Furthermore, the optimism led by US President Donald Trump's pivot on China tariffs turns out to be another factor driving flows away from the safe-haven JPY.
- In fact, Trump softened his stance after threatening additional tariffs of 100% on Chinese imports effective November 1 and posted on Truth Social that the US does not wish to hurt China. Trump added that both countries wish to avoid economic pain, easing concerns about a trade war between the world's two largest economies.
- The US Dollar looks to build on the previous day's positive move and remains within striking distance of its highest level since August touched last week, which further offers support to the USD/JPY pair. However, dovish Federal Reserve expectations might keep a lid on any further USD appreciation and cap the currency pair.
- According to the CME FedWatch tool, the possibility of a 25-basis-point interest rate cut by the Fed in October and December stands at around 97% and 90%, respectively. In contrast, traders are pricing in a greater chance that the BoJ would hike interest rates amid still sticky inflation and a still resilient economic performance.
- The US government shutdown is on track to extend into a third week amid deadlock on a funding plan. Republican Speaker Mike Johnson said that the shutdown could become the longest in history, warning that he won’t negotiate with Democrats until they pause their health care demands and reopen government.
- Important US macro releases have been delayed due to a prolonged US government shutdown, leaving the USD at the mercy of speeches from influential FOMC members. Hence, Tuesday's key focus will be on Fed Chair Jerome Powell's appearance, which could drive the USD and provide some impetus to the USD/JPY pair.
USD/JPY could climb further towards reclaiming 153.00; 100-hour SMA holds the key for bulls
From a technical perspective, the USD/JPY pair has been struggling to move back above the 100-hour Simple Moving Average (SMA). However, positive oscillators on hourly/daily charts back the case for a further appreciating move. Some follow-through buying beyond the 152.70-152.75 hurdle will reaffirm the positive outlook and lift spot prices to the 153.00 mark en route to the eighth-month high, around the 153.25-153.30 region, touched last Friday.
On the flip side, weakness below the Asian session trough, around the 152.15 region, could find some support near the 152.00 mark ahead of the 151.75-151.70 region. Any further slide is more likely to attract some buyers near the 151.15 region (Friday's swing low), which is closely followed by the 151.00 round figure. A convincing break below the latter could make the USD/JPY pair vulnerable to accelerate the fall below the 150.70 intermediate support, towards testing the 150.00 psychological mark. The latter also represents the 200-hour SMA and should act as a key pivotal point.
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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