The Japanese Yen (JPY) maintains its offered tone through the Asian session on Monday amid domestic political uncertainty. This, along with the US President Donald Trump’s pivot on China tariffs, fails to assist the safe-haven JPY to capitalize on Friday’s goodish recovery move against its American counterpart from the lowest level since February 13. The USD/JPY pair, however, struggles to build on the Asian session gains beyond the 152.00 mark amid a subdued US Dollar (USD) price action.
Furthermore, the divergent Bank of Japan (BoJ)-US Federal Reserve (Fed) policy expectations contribute to capping the USD/JPY pair amid relatively thin liquidity on the back of a bank holiday in Japan and the US. Nevertheless, the fundamental backdrop seems tilted in favor of the JPY bears, suggesting that any attempted recovery could be seen as a selling opportunity and is likely to remain capped. However, speculations that authorities could intervene to stem the JPY weakness warrant caution for bears.
Japanese Yen bears retain control amid domestic political chaos and easing trade tensions
- On Friday, US President Donald Trump threatened an additional 100% tariff on Chinese goods from November 1 in retaliation to new export controls Beijing is planning for valuable rare earth minerals. Vice President JD Vance defended Trump’s approach and warned that any aggressive Chinese response would be met with stronger US action.
- China’s Commerce Ministry responded by saying it will act to safeguard national interests if the US obstinately insists on new tariffs. The escalating rhetoric has cast uncertainty over a potential meeting between Trump and Chinese President Xi Jinping later this year, denting the global risk sentiment and boosting the safe-haven Japanese Yen.
- However, Trump sought to ease fears of a worsening trade conflict with China and posted on Truth Social that China’s economy will be fine and that the US wants to help China, not hurt it. Trump added that both countries wish to avoid economic pain, triggering a fresh wave of the global risk-on trade and undermining the JPY on Monday.
- Meanwhile, Japan’s Komeito party ended a 26-year partnership with the ruling Liberal Democratic Party (LDP), jeopardizing Sanae Takaichi’s bid to become the country’s first woman Prime Minister. This turns out to be another factor that undermines the JPY and lifts the USD/JPY pair back above the 152.00 round figure during the Asian session.
- Traders are still pricing in the possibility that the Bank of Japan will hike interest rates by the end of this year. In contrast, the US Federal Reserve is widely expected to lower borrowing costs two more times by the year-end. Furthermore, the US Dollar is seen consolidating Friday’s retracement slide and acts as a headwind for the USD/JPY pair.
- The US government shutdown began on October 1, with no end in sight yet. As a consequence of the budget freeze, Trump has already announced the first layoffs of federal employees. This is seen as another factor keeping the USD bulls on the defensive and warranting some caution before placing fresh bullish bets around the currency pair.
USD/JPY needs to find acceptance above 100-hour SMA/152.00 to back the case for further gains
From a technical perspective, the USD/JPY pair shows some resilience below the 23.6% Fibonacci retracement level of the recent surge from the monthly low amid positive oscillators on the daily chart. That said, Friday’s breakdown through the 100-hour Simple Moving Average (SMA) warrants some caution for bulls. Hence, it will be prudent to wait for a sustained move beyond the 152.20 area (100-hour SMA) before positioning for any further intraday appreciating move. Spot prices might then climb to the 152.70-152.75 intermediate hurdle and reclaim the 153.00 mark before aiming to test the eighth-month high, around the 153.25-153.30 region, touched on Friday.
On the flip side, Friday’s swing low, around the 151.15 region, could act as an immediate support. Some follow-through selling below the 151.00 round figure could drag the USD/JPY pair to the 38.2% Fibo. retracement level, around the 150.70 region. The corrective decline could extend further towards the 150.00 psychological mark. The latter also represents a confluence support – comprising the 200-hour SMA and the 50% Fibo. retracement level – and should act as a key pivotal point.
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.
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