Japanese Yen bulls seem hesitant amid fiscal woes, wide US-Japan rate gap
- USD/JPY stabilizes during the Asian session following the previous day’s modest losses.
- Japan’s fiscal concerns and the wide US-Japan rate gap keep JPY bulls on the defensive.
- Rising September Fed rate hike bets and geopolitical risks support the USD and the pair.
The USD/JPY pair holds steady below the 160.00 psychological mark during the Asian session on Tuesday and remains close to a one-month peak, which was retested the previous day.
Anxiety over Japan's massive national debt burden, surging long-term borrowing costs, and expansionary fiscal policies continue to undermine confidence in the Japanese Yen (JPY). Furthermore, the persistently wide interest rate gap between Japan and other major economies, including the US, keeps JPY bulls on the back foot, which, in turn, acts as a tailwind for the USD/JPY currency pair.
The US Dollar (USD), on the other hand, attracts fresh buyers following the previous day's pullback from an over two-week top amid hawkish US Federal Reserve (Fed) expectations and escalating US-Iran tensions. Traders ramped up bets for a rate hike by the US central bank in September following Fed Chair Kevin Warsh's comments at the Jackson Hole Symposium on Friday.
In fact, Warsh acknowledged that inflation is running hot and hinted on Friday that interest rates could need to move higher if more progress isn’t made on easing price pressures. Adding to this, inflation fears stemming from higher energy prices back the Fed's tightening bias, which, along with geopolitical uncertainties, continue to lend some support to the safe-haven Greenback.
In the latest developments surrounding the Middle East crisis, US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday, prompting an Iranian counterattack on American air bases in Jordan. US President Donald Trump threatened more strikes on Iran after the first exchange of direct attacks in a month, supporting crude oil prices and the USD.
The aforementioned fundamental backdrop seems tilted in favor of bulls, though fears of another joint intervention by Tokyo and Washington cap the upside for the USD/JPY pair. Traders now look to this week's important US macro releases, starting with the ISM Manufacturing PMI later today. The focus, however, will be on the US Nonfarm Payrolls (NFP) report on Friday.
USD/JPY 4-hour chart
Technical Analysis
The USD/JPY pair holds in a neutral near-term stance as it consolidates above the 100-period Simple Moving Average (SMA) at 159.19 on the 4-hour chart, which hints at an underlying bid. Spot prices, however, remain capped by the 200-period SMA at 160.26, keeping upside attempts in check while the pair fluctuates around the 50.0% Fibonacci retracement at 159.59.
Immediate resistance above the 200-period SMA is located at the 61.8% Fibo. at 160.62, while higher barriers emerge at 162.09 and 163.96. On the downside, initial support aligns with the 50.0% retracement at 159.59 and the 100-period SMA at 159.19, ahead of deeper Fibonacci supports at 158.56 and 157.28, with the broader structural floor seen near 155.21.
(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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