- The Japanese Yen weakens in reaction to political development after Sunday’s election.
- The uncertainty over the BoJ’s rate-hike plan weighs heavily on the JPY amid a bullish USD.
- Bets for a less aggressive Fed policy easing and rising US bond yields underpin the buck.
The Japanese Yen (JPY) drops to a fresh three-month low against its American counterpart during the Asian session on Monday after Japan’s longtime ruling party lost its majority for the first time in 15 years at Sunday’s national election. The outcome fueled speculations that the coalition government might pressure the Bank of Japan (BoJ) to take policy normalization slowly, which, in turn, is seen weighing heavily on the JPY. This, along with the underlying strong bullish tone surrounding the US Dollar (USD), lifts the USD/JPY pair beyond the mid-153.00s.
Meanwhile, the incoming US macro data continues to point to a still resilient economy and reaffirms market expectations that the Federal Reserve (Fed) will proceed with smaller rate cuts over the year. Furthermore, rising odds of Donald Trump winning the presidency and deficit-spending concerns after the US election trigger a fresh leg up in the US Treasury bond yields. This assists the USD Index (DXY) in standing firm near its highest level since July 30 and suggests that the path of least resistance for the lower-yielding JPY remains to the downside.
Daily Digest Market Movers: Japanese Yen is weighed down by domestic political uncertainty
- Japan’s ruling coalition lost its parliamentary majority in Sunday’s election for the first time since 2009, raising doubts over the Bank of Japan’s ability to hike interest rates further and leading to a bearish weekly gap opening for the Japanese Yen.
- Public broadcaster NHK reported that Prime Minister Shigeru Ishiba’s Liberal Democratic Party (LDP) and its coalition partner Komeito won 215 of 465 seats in the lower house, falling short of the 233 required for a majority and down from 279 held.
- Bets for smaller rate cuts by the Federal Reserve, along with concerns that spending plans of Vice President Kamala Harris and the Republican nominee Donald Trump will increase the deficit, lead to an extended sell-off in the US bond market.
- The yield on the benchmark 10-year US government bond stands firm near a three-month high touched last week, lifting the US Dollar closer to its highest level since July 30 and contributing to driving flows away from the lower-yielding JPY.
- In the latest geopolitical developments, Israel carried out precise strikes on military targets across Iran over the weekend in retaliation to the latter’s barrage of ballistic missiles fired earlier this month and months of continuous attacks.
- Meanwhile, Iran indicated that it will not retaliate to Israeli strikes if a deal is reached for a ceasefire agreement in Gaza and Lebanon, easing fears of a further escalation of tensions in the Middle East and a broader conflict in the region.
- China’s Vice Minister of Finance, Liao Min, said on Monday that the country will step up countercyclical adjustments of its macro policies to bolster economic recovery in the fourth quarter and is confident of achieving the 5% growth target.
Technical Outlook: USD/JPY needs to consolidate before the next leg of appreciating move
From a technical perspective, the recent breakout through the 200-day Simple Moving Average (SMA) and a subsequent move beyond the 61.8% Fibonacci retracement level of the July-September downfall could be seen as a fresh trigger for the USD/JPY bulls. This further validates the near-term positive outlook for the pair and supports prospects for additional gains beyond the 154.00 mark, towards the next relevant hurdle near the 154.35-154.40 supply zone. The momentum could extend further towards reclaiming the 155.00 psychological mark en route to the late July swing high, around the 155.20 region.
Meanwhile, the Relative Strength Index (RSI) on the daily chart has just started moving into overbought territory and warrants some caution for bullish traders. 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 pullback, however, now seems to find decent support near the 153.20-153.15 area ahead of the 153.00 mark and the Asian session low, around the 152.75 region. Some follow-through selling, however, could drag the USD/JPY pair to the 152.00 round figure.
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.
Source: https://www.fxstreet.com/news/japanese-yen-slumps-to-three-month-low-after-ruling-coalition-loses-majority-in-election-202410280230