Japanese Yen drifts lower against USD for the second day; downside seems limited
- The Japanese Yen retreats further from a two-week high touched against the USD on Thursday.
- Receding safe-haven demand undermines the JPY amid domestic political uncertainty.
- The divergent BoJ-Fed outlooks could support the lower-yielding JPY and cap USD/JPY.
The Japanese Yen (JPY) remains on the back foot against its American counterpart for the second straight day on Friday and moves away from an over two-week high touched the previous day. Data released earlier today showed that the Unemployment Rate in Japan rose more than expected, to 2.6% in August. Moreover, the upbeat market mood – despite the US government shutdown – turns out to be a key factor undermining the safe-haven JPY amid domestic political uncertainty. The US Dollar (USD), on the other hand, preserves Thursday's recovery gains from a one-week low and contributes to the USD/JPY pair's move beyond the mid-147.00s during the Asian session.
Any meaningful JPY depreciation, however, seems elusive in the wake of the growing acceptance that the Bank of Japan (BoJ) will stick to its policy normalization path and hike interest rates in October. This marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will lower borrowing costs two more times by the end of this year, which is seen acting as a headwind for the Greenback. Furthermore, the narrowing US-Japan rate differential supports the lower-yielding JPY and caps the USD/JPY pair. The US shutdown delayed the US Nonfarm Payrolls (NFP) report on Friday, leaving the USD and the pair at the mercy of speeches from influential FOMC members.
Japanese Yen is undermined by a combination of factors
- Government data showed this Friday that Japan's Unemployment Rate rose to 2.6% in August, compared to 2.3% in the previous month and consensus estimates for a reading of 2.4%.
- This comes ahead of the Liberal Democratic Party leadership election on Saturday, October 4th, and undermines the Japanese Yen during the Asian session amid the positive risk tone.
- The new Prime Minister will influence the trajectory of Japan's fiscal policy, which could further determine the Bank of Japan's policy stance and drive demand for the JPY in the near term.
- Traders have largely priced in Koizumi's victory. If Takaichi wins, it becomes a positive surprise, and the stock market could surge, said Kazuaki Shimada, Chief Strategist at IwaiCosmo Securities.
- Asian markets tracked Wall Street's another session of record highs on Wednesday amid expectations that the US government shutdown would have a limited impact on the economy.
- US Treasury Secretary Scott Bessent warned that the shutdown could hurt the economy more than those in the past, with potential hits to the GDP, growth, and the labor market.
- Bank of Japan Governor Kazuo Ueda said that the central bank must maintain an accommodative monetary environment to offset various uncertainties in Japan’s economic outlook.
- Ueda, however, reiterated that the BoJ will raise interest rates if the economy and prices move in line with forecasts, keeping hopes alive for an imminent rate hike later this month.
- In contrast, traders have fully priced in a rate cut by the Federal Reserve in October and see around a 90% probability of another rate reduction at the December FOMC meeting.
- Dallas Fed President Lorie Logan noted that inflation is running above target and that payroll gains have declined markedly. Logan sees risks on both sides of the Fed's mandate.
- The US Dollar struggles to build on the overnight bounce from a one-week low and might cap the USD/JPY pair, which seems poised to end the week on a downbeat note.
- Important US macro data scheduled at the beginning of a new month, including the Nonfarm Payrolls (NFP) report, could be delayed amid the US government shutdown.
USD/JPY might struggle to build on strength beyond 148.00
The USD/JPY pair has been showing resilience below the 147.00 mark and bounced off the 100-day Simple Moving Average (SMA) support near the 146.60-146.55 region for the second straight day on Thursday. The subsequent move up favors bullish traders. That said, oscillators on the daily chart have just started gaining negative traction, which, in turn, backs the case for the emergence of some selling near the 148.00 mark.
This is followed by a technically significant 200-day SMA, around the 148.35 zone, which, if cleared, might trigger a short-covering move. The USD/JPY pair might then climb to the 149.00 mark en route to the 149.35-149.40 region before making a fresh attempt to conquer the 150.00 psychological mark.
On the flip side, the 147.00 mark could protect the immediate downside ahead of the 146.60-146.55 pivotal support. Some follow-through selling has the potential to drag the USD/JPY pair to the 146.00 mark. The downward trajectory could extend further towards the September swing low, around the 145.50-145.45 region, en route to the 145.00 psychological mark.
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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