Japanese Yen bulls turn cautious amid fiscal woes, political uncertainty
- Japanese Yen struggles to capitalize on its strong gains amid concerns about Japan’s fiscal health.
- The BoJ’s hawkish outlook and intervention fears might continue to act as a tailwind for the JPY.
- The USD hangs near a four-month low amid Fed rate cut bets and contributes to capping USD/JPY.
The Japanese Yen (JPY) attracts some sellers during the Asian session on Tuesday and moves further away from the highest level since November 2025, touched against its American counterpart the previous day. Investors remain concerned about Japan's fiscal health on the back of Prime Minister Sanae Takaichi's aggressive spending and tax cut plans. This, along with a generally positive tone around the equity markets, is seen undermining the safe-haven JPY amid domestic political uncertainty ahead of a snap election on February 8.
That said, speculations that Japanese authorities would step in to stem further JPY weakness warrant caution for bearish traders amid the Bank of Japan's (BoJ) hawkish stance. The US Dollar (USD), on the other hand, languishes near a four-month low amid bets that the Federal Reserve (Fed) will lower borrowing costs two more times this year. Adding to this, the 'Sell America' trade acts as a headwind for the USD and should cap the USD/JPY as the market focus remains glued to the crucial two-day FOMC meeting, starting later today.
Japanese Yen bears seem hesitant as intervention speculations counter political uncertainty
- Japan's already strained public finances have come under increased scrutiny after Prime Minister Sanae Takaichi's pledge to suspend sales tax on food items as part of her campaign ahead of a snap lower house election on February 8.
- Nervousness over Japan’s fiscal outlook had been a key factor behind the recent surge in long-dated Japanese government bond (JGBs) yields, which will push up debt servicing costs. This, in turn, caps the upside for the Japanese Yen.
- Data released earlier this Tuesday showed that wholesale inflation in Japan slowed in the year to December. In fact, the Producer Price Index (PPI) climbed 2.4% YoY during the reported month, down from 2.7% rise recorded in November.
- Additional details revealed that Japan's Corporate Service Price Index rose 2.6% YoY in December compared to 2.7% prior. There was nothing in the data to contradict the Bank of Japan's rate-hike path, and it does little to influence the JPY.
- In fact, the BoJ raised its economic and inflation forecasts after leaving short-term interest rates unchanged at the end of a two-day meeting last Friday. The central bank also signaled readiness to continue hiking still-low borrowing costs.
- This marks a significant divergence compared to dovish US Federal Reserve expectations, which keeps the US Dollar on the defensive near a four-month low and supports the JPY amid fears of a potential intervention by Japanese authorities.
- Japan's PM Sanae Takaichi warned on Sunday that officials stand ready to take necessary steps against speculative and highly abnormal market moves following rate checks from Japan’s Ministry of Finance and the New York Fed on Friday.
- Traders, however, seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of a two-day FOMC meeting, starting today. The outcome will drive the USD and the USD/JPY pair in the near term.
USD/JPY needs to find acceptance below 100-day SMA to back the case for any further losses
The USD/JPY pair showed some resilience below the 100-day Simple Moving Average (SMA) on Monday, though it remains below the 154.75-154.80 horizontal support breakpoint. The Moving Average Convergence Divergence (MACD) histogram extends deeper into negative territory, indicating the MACD line below the Signal line and momentum under pressure below zero. The Relative Strength Index (RSI) sits at 32 (near oversold), suggesting downside could be stretched.
A daily close below the 100-day SMA at 153.81, which supports the USD/JPY pair in the near term, would hand bears more control, while sustained trade above it would keep the bias anchored by the rising SMA. A flattening MACD histogram and a move back toward the zero line would hint at momentum stabilization, and an RSI recovery toward 50 would improve tone; conversely, a drop into sub-30 would risk further weakness.
(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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