Japanese Yen struggles near two-week low vs. USD amid fiscal and political woes
- Japanese Yen remains on the back foot amid concerns about Japan’s fiscal situation.
- Political uncertainty ahead of the national snap election further undermines the JPY.
- The USD preserves its recent recovery gains and lends support to the USD/JPY pair.
The Japanese Yen (JPY) continues with its relative underperformance on the back of worries about the country's financial health, fueled by Prime Minister Sanae Takaichi's expansionary fiscal plans. Moreover, political uncertainty ahead of the snap election on February 8 turns out to be another bearish development for the JPY. Meanwhile, the recent US Dollar (USD) recovery from a four-year low contributed to the USD/JPY pair's strong move up since last Wednesday, pushing it to a nearly two-week high, around the 157.00 neighborhood, during the Asian session on Thursday.
Meanwhile, softer consumer inflation figures from Japan's capital city – Tokyo – released last week tempered bets for an early interest rate hike by the Bank of Japan (BoJ). Nevertheless, the central bank is expected to stick to its policy normalization path. This marks a significant divergence in comparison to expectations that the US Federal Reserve (Fed) will lower borrowing costs two more times this year. Apart from this, speculations that Japanese authorities would step in to stem further weakness in the domestic currency might hold back the JPY bears from placing fresh bets.
Japanese Yen bears retain control as fiscal and political concerns overshadow hawkish BoJ bets
- The incumbent Japanese Prime Minister Sanae Takaichi’s Liberal Democratic Party (LDP) is poised to score a strong victory in the lower house election on February 8. The outcome would give Takaichi a greater grip on Japan's parliament and more headroom to carry out her expansionary fiscal plans.
- Takaichi pledged to suspend the 8% consumption tax on food for two years as part of her election campaign, raising concerns about Japan’s fiscal outlook amid fears of debt-funded spending. This has been a key factor behind the Japanese Yen's relative underperformance since the beginning of this week.
- Moreover, Takaichi talked up the benefits of a weaker currency during a campaign speech. Although Takaichi later softened the stance, her comments raised doubts over whether authorities would intervene to support the domestic currency. This exerts additional downward pressure on the JPY.
- Meanwhile, data released last Friday showed that the headline Consumer Price Index (CPI) in Japan's capital city – Tokyo – fell last month to its weakest level since February 2022. This pointed to signs of softer demand-driven price pressure and reduced urgency for the Bank of Japan to tighten further.
- However, the Summary of Opinions from the BoJ's January meeting this week highlighted board members' hawkish view amid mounting price pressures from a weak JPY. Moreover, a private survey showed that Japan’s services sector growth accelerated in January at its fastest pace in almost a year.
- This suggests that a BoJ rate hike in the first half of 2026 remains on the table. In contrast, traders are pricing in the possibility of two more interest rate cuts by the US Federal Reserve this year, which caps the USD/JPY pair near the 157.00 mark, or a nearly two-week top set earlier this Thursday.
- In fact, US President Donald Trump said that he would have passed on Kevin Warsh as his nominee to lead the Federal Reserve if he had expressed a desire to hike interest rates. Trump further added that there was not much doubt that the US central bank would lower interest rates.
- The US Dollar, however, has climbed to a fresh high since January 23 in the wake of hawkish comments from Fed Governor Lisa Cook, saying that risks are skewed toward higher inflation. This could support the USD/JPY pair as traders now look to a duo of US labor market reports for a fresh impetus.
- Thursday's US economic docket features the delayed release of the JOLTS Job Openings data, along with the usual Weekly Initial Jobless Claims. This, along with speeches by influential FOMC members, would drive the USD and produce short-term trading opportunities around the USD/JPY pair.
USD/JPY bulls have the upper hand as a breakout through 156.50 remains in play
The overnight breakout through the 156.50 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 61.8% Fibonacci retracement level of the 159.13-152.06 downfall – favors the USD/JPY bulls. The Moving Average Convergence Divergence (MACD) stands in positive territory while its histogram contracts, suggesting fading bullish momentum. The Relative Strength Index (RSI) prints 68.92, just below overbought.
This, in turn, suggests that the rebound could extend toward the 78.6% retracement at 157.64, while a rejection near resistance would risk a pullback to the 50% retracement at 155.60. A re-expansion of the MACD histogram and a firm RSI above 70 would strengthen the bullish case; otherwise, momentum looks prone to consolidation below resistance.
(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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