The Japanese Yen (JPY) dives to the lowest level since early August against its American counterpart at the start of a new week after a fiscal dove, Sanae Takaichi, was elected as the leader of Japan’s ruling Liberal Democratic Party (LDP). Takaichi would become the first female Prime Minister of Japan and is expected to oppose any further monetary tightening by the Bank of Japan (BoJ). This, along with the prevalent risk-on environment, is seen exerting intense pressure on the safe-haven JPY.
Meanwhile, a steep decline in the JPY provides a strong boost to the US Dollar (USD) and pushes the USD/JPY pair beyond the 150.00 psychological mark during the Asian session. That said, the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year and concerns that a prolonged US government shutdown could impact the US economic performance could act as a headwind for the USD. This, in turn, might cap gains for the currency pair.
Japanese Yen retains bearish bias as Takaichi’s win sparks fiscal easing bets, tempers BoJ rate hike bets
- Sanae Takaichi was elected as the leader of the Liberal Democratic Party (LDP) in a run-off election held on Saturday and is now expected to be confirmed as Japan’s first female Prime Minister during a parliamentary session in mid-October. Takaichi stood out in the race as the only proponent of big spending and loose monetary policy.
- Expectations for more expansionary economic policies could complicate the Bank of Japan’s task and also seem to have raised the chances that the central bank will avoid raising interest rates this month. The optimism lifts Japan’s Nikkei 225 to a fresh record high and weighs heavily on the Japanese Yen during the Asian session on Monday.
- Meanwhile, BoJ Governor Kazuo Ueda reiterated last week that the central bank will raise interest rates if the economy and prices move in line with forecasts. Moreover, markets are fully pricing in another rate increase by the BoJ early next year, which might continue to offer some support to the JPY and help limit deeper losses.
- The BoJ’s hawkish stance marks a significant divergence in comparison to rising bets that the US Federal Reserve (Fed) will lower borrowing costs in October and in December. Adding to this, concerns about the economic impact of a US government shutdown might keep a lid on any further USD appreciation and cap the USD/JPY pair.
- Important US macro releases scheduled at the start of a new month have been delayed due to the government closure, leaving the USD at the mercy of speeches from influential FOMC members. This, along with the broader risk sentiment, could drive the USD/JPY pair ahead of Japan’s Household Spending data due for release on Tuesday.
USD/JPY seems poised to climb further following an intraday breakout above 150.00
From a technical perspective, last week’s bounce from the 100-day Simple Moving Average (SMA) and a subsequent move up beyond the 150.00 round figure will be seen as a fresh trigger for the USD/JPY bulls. Given that oscillators on the daily chart have again started gaining positive traction, spot prices might then aim to test the August monthly swing high, around the 151.00 neighborhood, with some intermediate resistance near the 150.65-150.70 region.
On the flip side, any corrective slide below the 149.40 immediate support could be seen as a buying opportunity and remain limited near the Asian session low, around the 149.00 mark. A convincing break below the latter could drag the USD/JPY pair to the next relevant support near the 148.35 region en route to the 148.00 round figure and the 147.80 zone, which, if broken, might shift the near-term bias in favor of bearish traders.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.