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Japanese Yen hits multi-month low vs USD amid fiscal, BoJ uncertainty | FXStreet

The Japanese Yen (JPY) turns lower for the fourth straight day against a broadly firmer US Dollar (USD), pushing the USD/JPY pair to a fresh low since mid-January during the Asian session on Thursday. Investors remain concerned about Japan’s ailing fiscal position amid Prime Minister Sanae Takaichi’s new economic stimulus package. Moreover, data released earlier this week showed that Japan’s economy contracted in Q3 for the first time in six quarters, which could put additional pressure on the Bank of Japan (BoJ) to delay raising interest rates and continue to undermine the JPY.

Apart from this, the risk-on impulse turns out to be another factor denting the JPY’s safe-haven status. The USD, on the other hand, advances to its highest level since late May amid less dovish Federal Reserve (Fed) expectations and offers additional support to the USD/JPY pair. Meanwhile, the recent JPY decline prompted some verbal intervention from Japanese authorities, though it does little to provide any respite to bulls. This, in turn, suggests that the path of least resistance for the JPY is to the downside. Traders now look to the delayed release of the US Nonfarm Payrolls (NFP) report for a fresh impetus.

Japanese Yen continues with its underperformance despite some verbal intervention from authorities

  • Japan’s Chief Cabinet Secretary Minoru Kihara said in a statement this Thursday that the recent FX moves are sharp, one-sided and that he is watching FX market move with a high sense of urgency. FX market needs to move stably reflecting fundamentals, Kihara added further.
  • This comes after Japan’s Finance Minister Satsuki Katayama issued a fresh warning on Wednesday and said that the government was closely monitoring markets with a high sense of urgency. This fuels intervention fears, though it does little to ease the Japanese Yen selling bias.
  • Japan’s yield curve has steepened sharply as investors priced in a bigger-than-anticipated spending package from the new Prime Minister Sanae Takaichi. Goushi Kataoka – member of a key government panel – said earlier this week that Japan must compile a stimulus of around ¥23 trillion.
  • Kataoka added on Wednesday that the Bank of Japan is unlikely to raise interest rates before March, arguing policymakers must first confirm that a major fiscal package is lifting domestic demand. This signals the Takaichi administration’s preference for interest rates to stay low.
  • Government data released on Monday showed that Japan’s economy contracted for the first time in six quarters during the July-September period. This further tempers expectations that the BoJ will hike rates soon and might hold back the JPY bulls from placing aggressive bets.
  • The US Dollar moves back closer to its highest level since May, touched earlier this month amid less dovish Federal Reserve expectations. In fact, chances of another rate cut in December fell after the October FOMC meeting minutes showed that members were divided about how to proceed.
  • Traders now look forward to the delayed release of the US Nonfarm Payrolls (NFP) report for more cues about the Fed’s rate-cut path. This, in turn, will play a key role in influencing the USD and providing some impetus to the USD/JPY pair later during the North American session.

USD/JPY bulls might pause for a breather as daily RSI is flashing slightly overbought conditions

The daily Relative Strength Index (RSI) is flashing slightly overbought conditions and holding back traders from placing fresh bullish bets around the USD/JPY pair. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.

Any corrective slide, however, might now find decent support near the 156.65-156.60 region, below which the USD/JPY pair could extend the fall towards the 156.00 mark. The latter should act as a pivotal point, and a sustained weakness below might prompt some technical selling, which should pave the way for deeper losses.

On the flip side, the 157.40-157.45 region could act as an immediate hurdle, above which the USD/JPY pair could accelerate the momentum towards reclaiming the 158.00 round figure. The next relevant resistance is pegged near mid-158.00s before spot prices aim to test the January swing high, around the 159.00 neighborhood.

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.