The Japanese Yen (JPY) regains positive traction against its American counterpart during the Asian session on Wednesday, following the previous day’s two-way price swings, and seems poised to climb further. Expectations that Japanese authorities would intervene to counter further weakness in the domestic currency act as a tailwind for the JPY. Adding to this, prospects for further policy tightening by the Bank of Japan (BoJ) and the prevalent risk-off mood offer some support to the safe-haven JPY.
The JPY bulls, however, might refrain from placing aggressive bets and opt to wait for the outcome of a two-day BoJ meeting on Friday, for more cues about the timing of the next rate hike. In the meantime, this week’s slump in Japanese government bonds (JGB), triggered by concerns about Japan’s fiscal health on the back of Prime Minister Sanae Takaichi’s fiscally expansionary policies, might contribute to capping the JPY. This, in turn, warrants caution before positioning for any further appreciation.
Japanese Yen edges higher as a combination of supporting factors offset political uncertainty
- Japan’s Finance Minister Satsuki Katayama last week hinted at the possibility of joint intervention with the US to deal with the recent weakness in the Japanese Yen. This, along with hawkish Bank of Japan expectations and sustained safe-haven buying, assists the JPY to gain some positive traction during the Asian session on Wednesday.
- A Bank of Japan survey for December showed on Monday that most Japanese households expect prices to keep rising for the next few years. This comes on top of data released last Friday, which revealed that Japan’s inflation has averaged above the BoJ’s 2% target for four straight calendar years, and backs the case for further policy tightening.
- In fact, Reuters reported last week, citing sources, that some BoJ policymakers see scope to raise rates sooner than markets expect, with April a distinct possibility, as a sliding JPY risks adding to already broadening inflationary pressure. Moreover, concerns about Japan’s worsening finances led to a sharp rise in the Japanese government bond yields.
- On Monday, Japan’s Prime Minister Sanae Takaichi announced plans to hold a snap election in February. With Takaichi’s popularity running high, a strong majority for the ruling Liberal Democratic Party (LDP) in the lower house would give her more freedom to pursue her agenda and heighten the chance of more spending and tax cuts after the election.
- Investors gave a thumbs down to Takaichi’s fiscal policies, pushing the yield on the 40-year JGB to a fresh high since its debut in 2007. Adding to this, a fall in demand at the 20-year debt auction opened the floodgates, sending yields into uncharted territory amid a broader selloff in government bonds. This could keep a lid on further JPY gains.
- The US Dollar, on the other hand, struggles to capitalize on the overnight bounce from a two-week low and remains under some selling pressure for the third straight day as renewed trade war fears have revived the ‘Sell America’ trade. This further weighs on the USD/JPY pair, though traders seem reluctant ahead of a two-day BoJ meeting.
- After raising the overnight interest rate last month to 0.75%, or the highest in 30 years, the BoJ is expected to maintain the status quo on Friday. The focus, meanwhile, remains glued to BoJ Governor Kazuo Ueda’s comments during the post-decision press conference on Friday, which will be looked for cues about the timing of the next rate hike.
- Heading into the key central bank event risk, traders will confront the release of the US Personal Consumption Expenditure (PCE) Price Index on Thursday. This will be accompanied by the final US Q3 GDP growth report and offer cues about the US Federal Reserve’s rate-cut path, which will drive the USD and influence the USD/JPY pair.
USD/JPY continues with its struggle to find acceptance above 100-hour SMA; seems vulnerable
The 100-period Simple Moving Average (SMA) slopes lower at 158.17, with the USD/JPY pair holding beneath it, keeping a bearish intraday bias. A recovery above this SMA would ease downside pressure. The Moving Average Convergence Divergence (MACD) and its Signal line are clustered around the zero mark, and a flat histogram suggests limited momentum. The Relative Strength Index (RSI) sits at 48 (neutral), offering little directional edge. Measured from the 159.46 high to the 157.41 low, the 38.2% Fibonacci retracement at 158.19, and the 50% retracement level at 158.43, cap initial rebounds.
While price trades below the 100 SMA, sellers retain the near-term advantage, and rallies would be capped by nearby resistance overhead. A decisive push above the average could open a path toward the next retracement barrier, whereas failure to reclaim it keeps pressure on the one-hour tone. The MACD would need to hold above zero to strengthen an upside reversal, and a turn back into negative territory would reinforce a sluggish backdrop. RSI edging toward 50 would help stabilize, but a drop back through the mid-40s would leave the bias soft.
(The technical analysis of this story was written with the help of an AI tool.)
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.