Japanese Yen weakens amid BoJ uncertainty and fiscal concerns | FXStreet
The Japanese Yen (JPY) remains on the back foot against a broadly firmer US Dollar (USD) through the Asian session on Monday and seems vulnerable to slide further amid concerns about Japan’s ailing fiscal position. Moreover, the growing acceptance that the Bank of Japan (BoJ) would delay raising interest rates on the back of Prime Minister Sanae Takaichi’s pro-stimulus stance and political resistance might continue to undermine the JPY. Apart from this, a generally positive risk tone validates the near-term negative outlook for the safe-haven JPY amid the underlying USD bullish sentiment.
Meanwhile, comments from Japan’s Finance Minister Satsuki Katayama on Friday fueled speculations that authorities could step in to stem further JPY weakness. Moreover, a member of a key government panel said on Sunday that Japan can intervene in the market to mitigate the negative economic impact of a weak JPY. This might hold back the JPY bears from placing aggressive bets. The USD, on the other hand, stands firm near a multi-month peak amid less dovish Federal Reserve (Fed) expectations. This, in turn, suggests that the path of least resistance for the USD/JPY pair remains to the upside.
Japanese Yen bears have the upper hand amid fiscal concerns, BoJ rate hike doubts and positive risk tone
- On Friday, Japan’s cabinet approved a ¥21.3 trillion economic stimulus plan, marking the first significant policy initiative under Prime Minister Sanae Takaichi. The package contains ¥17.7 trillion in general account outlays, which exceeds the previous year’s ¥13.9 trillion and represents the largest stimulus since the COVID pandemic. It will also include tax cuts totaling ¥2.7 trillion.
- This amplifies concerns about Japan’s ailing fiscal position and fuels worries about the supply of new government debt, which keeps Japan’s borrowing costs close to the highest level in decades. Moreover, data released last week showed that Japan’s economy contracted in Q3 for the first time in six quarters, putting additional pressure on the Bank of Japan (BoJ) to delay raising interest rates.
- Apart from this, the upbeat market mood prompts fresh selling around the safe-haven Japanese Yen during the Asian session on Monday amid relatively thin liquidity on the back of a holiday in Japan. The US Dollar, on the other hand, stands firm near its highest level since late May as traders have been scaling back their bets for another interest rate cut by the US Federal Reserve in December.
- In fact, minutes from the October FOMC meeting, released last Wednesday, showed that policymakers cautioned that cutting interest rates further could risk entrenched inflation. Moreover, the better-than-expected release of the delayed US Nonfarm Payrolls report for September eases concerns about the softening labor market conditions and validates less dovish Federal Reserve (Fed) expectations.
- Meanwhile, BoJ Governor Kazuo Ueda told the parliament on Friday that a weak JPY could push up import costs and broader prices. Moreover, Japan’s Statistics Bureau reported that inflation remains sticky above the BoJ’s 2% target, keeping alive hopes for a near-term interest rate hike. A Reuters poll showed that a slim majority of economists expect the BoJ to raise rates to 0.75% in December.
- Japan’s Finance Minister Satsuki Katayama, in the strongest warning to date, said on Friday that we will take appropriate action as needed against excess volatility and disorderly market moves, and also signaled chances of intervention. Adding to this, an adviser to PM Takaichi said on Sunday that Japan has excessive foreign reserves, so it can become active in tapping them to conduct JPY intervention.
USD/JPY constructive technical setup backs the case for an extension of the recent well-established uptrend
A subsequent strength beyond the 157.00 mark could lift the USD/JPY pair further towards the 157.45-157.50 intermediate hurdle en route to the 157.85-157.90 region, or an over ten-month peak touched last week. Some follow-through buying beyond the 158.00 round figure will be seen as a fresh trigger for bullish traders and pave the way for a further near-term appreciating move.
On the flip side, the 156.25-156.20 zone now seems to have emerged as an immediate support. This is followed by the 156.00 mark, which, if broken decisively, might prompt some technical selling and drag the USD/JPY pair to the 155.45-155.40 intermediate support en route to the 155.00 psychological mark. Any further decline is more likely to find decent support and attract fresh buyers near the 154.50-154.45 horizontal resistance breakpoint. The latter should act as a key pivotal point and as a strong near-term base for spot prices.
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.
