Japanese Yen drifts lower as fiscal worries, political risks counter hawkish BoJ
- Japanese Yen retreats from three-month high set against the USD on Tuesday.
- Fiscal worries, political uncertainty, and a positive risk tone undermine the JPY.
- The divergent BoJ-Fed outlooks might cap USD/JPY ahead of the FOMC decision.
The Japanese Yen (JPY) drifts lower during the Asian session on Wednesday amid concerns about Japan's fiscal health on the back of Prime Minister Sanae Takaichi's aggressive spending and tax cut plans. Adding to this, domestic political uncertainty ahead of a snap election on February 8 and a positive risk tone drag the safe-haven JPY away from a nearly three-month peak, touched against a broadly weaker US Dollar (USD) on Tuesday.
Meanwhile, the JPY bulls seem unimpressed by hawkish Bank of Japan (BoJ) December meeting minutes, which showed that members agreed on the need to continue raising interest rates. This marks a significant divergence in comparison to bets for at least two more rate cuts by the US Federal Reserve (Fed) and could support the lower-yielding JPY amid intervention fears. Apart from this, a bearish USD should cap the USD/JPY recovery.
Japanese Yen bulls shrug off hawkish BoJ meeting minutes amid domestic uncertainties
- Minutes of the Bank of Japan's December policy meeting, released this Wednesday, showed that the board judged the economy to be recovering moderately, albeit with pockets of weakness. The minutes further revealed that policymakers were becoming more confident that Japan is sustaining a moderate wage–price cycle, and were using that assessment to justify another step toward less accommodative policy.
- The remarks highlighted the central bank's readiness to continue pushing up still-low borrowing costs. A few board members, however, said the central bank must be mindful of the impact a weak Japanese Yen could have on underlying inflation in deciding when to raise interest rates again. This, along with nervousness over Japan's fiscal outlook and political uncertainty, prompts some selling around the JPY.
- Japan's Prime Minister Sanae Takaichi pledged to abolish sales tax on food items for two years as part of her campaign ahead of a snap lower house election on February 8. Given that Japan's gross government debt has exceeded 200% of GDP for the past 15 years, Takaichi's spending and tax cut plans fueled concerns about a deterioration in Japan’s public finances. This further drags the JPY lower on Wednesday.
- The US Dollar, on the other hand, stages a goodish recovery from a four-year low, touched on Tuesday, as bears opt to lighten their bets ahead of the highly-anticipated Federal Reserve rate decision later today. The focus, however, will be on the post-meeting press conference, where comments from Fed Chair Jerome Powell will be scrutinized for cues about the rate-cut path and influence the USD demand.
- Nevertheless, traders are still pricing in the possibility that the US central bank would lower borrowing costs two more times in 2026. Adding to this, concerns over the Fed’s independence, along with heightened economic and policy risk linked to US President Donald Trump's trade and geopolitical decisions, should cap gains for the USD and the USD/JPY pair amid the divergent BoJ-Fed outlooks.
USD/JPY seems vulnerable as breakdown below 100-day SMA remains in play
The overnight sustained breakdown through the 100-day Simple Moving Average (SMA) and a close below the 154.00 mark was seen as a fresh trigger for the USD/JPY bears. Spot prices hold beneath the said support levels, keeping the near-term tone heavy despite the broader uptrend. The Moving Average Convergence Divergence (MACD) line stands below the Signal line and under the zero mark, with a widening negative histogram that reinforces bearish momentum.
The Relative Strength Index (RSI) prints at 30.94 (oversold), which could allow for a pause or a corrective bounce. Measured from the 140.12 low to the 159.19 high, the 38.2% retracement at 151.91 offers initial support, and a break lower would extend the slide.
Should downside persist, the pullback would open the 50.0% retracement at 149.66 as the next support layer within the broader advance. A contraction in the MACD’s negative histogram and a bullish crossover would soften the bearish bias, while an RSI recovery above 30 would corroborate stabilizing momentum. Reclaiming levels above the rising 100-day SMA would ease pressure and shift focus back to upside retracements in the sequence.
(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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