Japanese Yen gathers strength amid surging 10-year JGB yields
- USD/JPY weakens to near 157.85 in Thursday’s Asian session.
- Japan’s 10-year JGB yield rose 8 bps to 3.055%, its highest since August 1996.
- Fed's Barr said further policy adjustments are likely to be needed to get inflation under control.
The USD/JPY pair attracts some sellers to around 157.85 during the Asian trading hours on Thursday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) as traders remain on high alert for further intervention from Japanese authorities. The Fedspeak will be closely watched later on Thursday.
Japanese Finance Minister Satsuki Katayama said on Thursday that the principles on foreign exchange established since the coordinated Japan-US intervention remain in effect.
Meanwhile, Japan's 10-year government bond (JGB) yield climbed by 8 basis points (bps) to 3.055%, a 30-year high early on the day after US Treasury yields surged overnight.
Last week, the Bank of Japan (BoJ) raised its policy rate by 25 basis points (bps) to 1.25%, their highest level since 1995. The vote was 7-2 as board members Toichiro Asada and Ayano Sato dissented. Markets view the dissent from two policymakers as a warning that additional hikes may be harder to implement. This, in turn, might cap the upside for the JPY.
Markets are pricing about a 30% chance that the Japanese central bank lifts its benchmark short-term rate to 1.50% in October, according to Bloomberg.
Hawkish remarks from the Federal Reserve (Fed) officials could provide some support to the Greenback. Fed Governor Michael Barr said on Wednesday that the US central bank took an important step last week to "recalibrate" short-term borrowing costs to bring down inflation and will likely need to deliver further interest rate hikes.
Japan-US alignment extends into BoJ policy and Yen carry dynamics
Analysts at Rabobank highlight that the evolving geopolitical backdrop is increasingly intertwined with financial market dynamics. They note that “Trump and Japan’s PM Takaichi met to reaffirm their close geopolitical and geoeconomic alliance,” and stress that “that now encompasses the BoJ and the Yen carry trade too.” In this context, Rabobank points out that “Japan’s big banks' domestic loan share is seeing its first sustained post-1991 bubble burst rise,” describing this as “exactly what the White House and Takaichi want as (defence) industry investment rises.”
Fed’s Barr flags more hikes as inflation risks rise, supporting Dollar upside
Fed’s Barr delivers a distinctly hawkish tone, with the FXS Speechtracker score at 8/10, above the 7/10 historical average and signaling a stronger-than-usual tightening bias. The assertion that “further rate hikes [are] likely needed to ensure timely return to 2% inflation,” alongside comments that inflation risks have increased while labor market risks have receded, underscores a clear prioritization of price stability over employment concerns. By admitting the Fed was “out of position” and needed to recalibrate policy, Barr reinforces the narrative that policy rates may need to move higher or stay restrictive for longer, a backdrop typically supportive for the Dollar and negative for risk-sensitive assets.
The FXS Fed Sentiment Index rose by 0.42 points to 148.81, firmly in hawkish territory well above the neutral 100 threshold, confirming that this speech nudges the overall Fed narrative further toward tightening. The combination of an elevated FXS Fed Sentiment Index and an above-baseline FXS Speechtracker score suggests markets should price in a higher probability of additional rate hikes, with implications for Dollar strength and continued headwinds for duration and high-beta FX.
Technical Analysis: USD/JPY
In the daily chart, USD/JPY maintains a mildly bearish tone as it sits between the 20-period Bollinger middle band and the 100-day moving average (MA) resistance. The pair holds above its lower volatility floor, but with price still capped beneath the upper Bollinger band, the broader setup hints at a market that is heavy on rallies. A Relative Strength Index (14) reading around 54 keeps momentum broadly neutral to slightly positive, suggesting that while downside pressure is contained for now, buyers may struggle to decisively reclaim the cluster of resistance overhead.
On the topside, initial resistance is located at the 100-day MA at 159.55, followed by the upper Bollinger band at 160.75, where any test would likely attract profit-taking and fresh supply. On the downside, the first layer of support emerges at the Bollinger middle band at 156.50, ahead of a stronger structural floor at the lower band near 152.30; a daily close below this latter level would significantly deepen the bearish bias and open the way toward lower medium-term levels.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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