The Japanese Yen (JPY) retreats from a one-week high, touched against its American counterpart during the Asian session on Wednesday, though the downside seems limited. The Bank of Japan (BoJ) could resist early tightening in the wake of Japan’s new Prime Minister Sanae Takaichi’s aggressive fiscal spending plans. Furthermore, the US-China trade optimism continues to undermine safe-haven assets, including the JPY. The US Dollar (USD), on the other hand, gains some positive traction amid some repositing trade ahead of the crucial FOMC decision and assists the USD/JPY pair to climb back above the 152.00 mark.
Meanwhile, comments from Japan’s Economics Minister Minoru Kiuchi on Tuesday fueled speculations about a possible government intervention to stem further JPY weakness. Moreover, the outcome of a high-profile meeting between US President Donald Trump and Japan’s Takaichi might continue to act as a tailwind for the JPY. Adding to this, supportive remarks from US Treasury Secretary Scott Bessent, along with bets for an imminent BoJ rate hike, could limit losses for the JPY. Traders might also opt to wait for the outcome of a two-day FOMC meeting later this Wednesday and the BoJ policy update on Thursday.
Japanese Yen bulls seem non-committed as fiscal concerns counter BoJ rate hike bets
- On Wednesday, US Treasury Secretary Scott Bessent urged Japan’s government to allow the Bank of Japan policy space to keep inflation expectations anchored and avoid excess exchange rate volatility. The remarks revived market expectations that the US may continue to press Japan to tighten monetary policy more quickly.
- This follows a verbal intervention from Japan’s Economics Minister Minoru Kiuchi on Tuesday, emphasizing the importance of stable FX moves that reflect economic fundamentals. Kiuchi added that he plans to assess the impact of FX changes on Japan’s economy and that it is important to avoid rapid, short-term fluctuations.
- Furthermore, US President Donald Trump and Japan’s new Prime Minister Sanae Takaichi signed an agreement laying out a framework to secure mining and processing of rare earths and other critical minerals. This contributes to the Japanese Yen’s relative outperformance against its G-10 peers for the second straight day.
- Meanwhile, Takaichi’s pro-stimulus stance to revitalize the economy could further delay the BoJ’s tightening plan. Traders, however, seem convinced that the central bank will eventually hike interest rates in December or early next year. This marks a significant divergence in comparison to dovish Federal Reserve expectations.
- The US central bank is universally anticipated to lower borrowing costs by 25-basis-points at the end of a two-day meeting later today. Moreover, traders have been pricing in a greater chance of another rate cut in December, which keeps the US Dollar depressed and contributes to the USD/JPY pair’s ongoing corrective fall.
- Apart from the crucial Fed rate decision, market participants will closely scrutinize the latest BoJ policy update on Thursday. A further hawkish signal would be enough to further boost the JPY. However, a surprisingly dovish tilt, though unlikely, would negate any positive outlook for the JPY and prompt aggressive selling.
USD/JPY is more likely to attract fresh sellers and remain capped near the 153.00 mark
This week’s failure near the 153.25-153.30 hurdle, or the monthly swing high, constitutes the formation of a bearish double-top pattern on the daily chart and backs the case for a further depreciating move for the USD/JPY pair. That said, oscillators on the said chart are holding in positive territory, suggesting that any further slide could find some support near the 151.10-151.00 region. A convincing break below the latter, however, should pave the way for deeper losses towards the 150.00 psychological mark with some intermediate support near the 150.45 zone.
On the flip side, any meaningful recovery beyond the Asian session peak, around the 152.20 area, is more likely to attract fresh sellers and remain capped near the 152.90-153.00 region. Some follow-through buying, leading to a further strength beyond the 153.25-153.30 zone, will be seen as a fresh breakout and allow the USD/JPY pair to reclaim the 154.00 mark. The momentum could extend further towards the next relevant resistance near mid-154.00s en route to the 154.75-154.80 region and the 155.00 psychological mark.
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.