Japanese Yen strengthens amid safe-haven demand; USD/JPY under pressure on weaker USD
- The Japanese Yen attracts follow-through buying amid easing concerns about Japan’s fiscal health.
- Rising US-China trade tensions and geopolitical risks further benefit the JPY’s safe-haven status.
- Dovish Fed expectations undermine the USD, exerting additional pressure on the USD/JPY pair.
The Japanese Yen (JPY) remains on the front foot against its American counterpart for the third consecutive day and climbs to an over one-week high during the Asian session on Thursday. The ruling Liberal Democratic Party's (LDP) coalition split with the Komeito jeopardized Sanae Takaichi's, who is known for her pro-stimulus stance, bid to become the country's first woman Prime Minister. This resulted in the reversal of the Takaichi trade, which, in turn, has been a key factor underpinning the JPY. Adding to this, escalating US-China trade tensions, rising geopolitical risks, and concerns about a prolonged US government shutdown drive safe-haven flows towards the JPY.
Meanwhile, traders have been pricing in the possibility that the Bank of Japan (BoJ) may delay further tightening in the wake of a heightened domestic political uncertainty. This might hold back the JPY bulls from placing aggressive bets amid a positive risk tone. Nevertheless, the BoJ is expected to stick to its policy normalization path and hike interest rates by the year-end. This marks a significant divergence in comparison to bets that the US Federal Reserve (Fed) will lower borrowing costs two more times this year. The latter keeps the US Dollar (USD) bulls on the defensive and backs the case for an extension of the USD/JPY pair's recent pullback from an eighth-month high.
Japanese Yen continues to gain traction as markets reverse Takaichi trade
- The long-standing Liberal Democratic Party (LDP)–Komeito coalition came to an abrupt end last week. The breakup, in turn, means the newly elected LDP leader, Sanae Takaichi, would need support from other parties to confirm her as Japan’s first female Prime Minister.
- Takaichi is a supporter of the former Premier Shinzo Abe's economic policies, who advocated heavy spending and monetary stimulus to support the economy. The developments, however, helped ease concerns about Japan’s fiscal health and underpinned the Japanese Yen.
- Meanwhile, Japan's parliament failed to set a date for its vote on the new Prime Minister as opposition parties are also holding talks to secure enough backing to form a new government. The uncertainty creates a challenge for the Bank of Japan to hike interest rates further.
- US-China trade tensions escalated in recent weeks after the US broadened tech restrictions and China outlined tighter export controls on rare earths. Moreover, both countries announced the tit-for-tat port fees on vessels linked to each other’s fleets, fueling trade war fears.
- In fact, US President Donald Trump said he saw the US as locked in an all-out trade war with China. However, US Treasury Secretary Scott Bessent proposed a longer pause on high tariffs on Chinese goods if China halts its plan for strict export controls on critical minerals.
- On the geopolitical front, US secretary of war Pete Hegseth warned Russia to stop fighting or risk a response only the US can give. This raises the risk of a further escalation of the protracted Russia-Ukraine war and benefits the JPY's safe-haven status amid BoJ rate hike bets.
- Meanwhile, BoJ board member Naoki Tamura said on Thursday that the economic growth rate in Japan is likely to rise and the slowdown in overseas economies will not be as significant as initially expected. Tamura added that the BoJ should push rates closer toward levels deemed neutral.
- This marks a significant divergence in comparison to firming expectations that the US Federal Reserve will deliver a 25-basis-point rate cut each in October and in December. Moreover, concerns that the US government closure would affect the economy weigh on the USD.
- A judge on Wednesday temporarily blocked the Trump administration from firing federal workers amid the ongoing shutdown, which started on October 1. This comes as the Senate fails to advance a House-passed GOP bill to fund the government for the ninth time.
- Traders now look to speeches from a slew of influential FOMC members, due later during the North American session, for more rate-cut cues. This, in turn, will play a key role in influencing the USD price dynamics and provide some impetus to the USD/JPY pair.
USD/JPY could weaken further towards the 150.00 psychological mark
The overnight downfall dragged the USD/JPY pair below the 200-hour Simple Moving Average (SMA). The subsequent slide below the 150.70 area, or the 38.2% Fibonacci retracement level of the recent solid recovery from the October monthly swing low, could be seen as a key trigger for bearish traders. However, oscillators on the daily chart are still holding in positive territory, suggesting that spot prices could find some support near the 150.00 psychological mark. The said handle coincides with the 50% Fibo. retracement level, which, if broken decisively, might expose the 61.8% Fibo. retracement level, around the 149.15 region.
On the flip side, any recovery attempt might now confront an immediate barrier near the 151.00 mark. A sustained move beyond could lift the USD/JPY pair further, though it is more likely to remain capped near the 151.65 confluence hurdle. The said area comprises the 200-hour SMA breakpoint and the 23.6% Fibo. retracement level. However, some follow-through buying would negate any near-term negative bias and allow spot prices to reclaim the 152.00 round figure before climbing further towards the weekly swing high, around the 152.60 region.
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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