Japanese Yen recovers further against USD, upside potential seems limited
- The Japanese Yen attracts some follow-through buying amid fears of a government intervention.
- The uncertainty over the BoJ’s rate-hike plans and the upbeat mood could cap the safe-haven JPY.
- Bets for a less aggressive Fed easing may underpin the USD and lend support to the USD/JPY pair.
The Japanese Yen (JPY) kicks off the new week on a slightly positive note against its American counterpart and looks to build on Friday's modest recovery from the vicinity of the lowest level since early August. The JPY draws some support from the recent verbal intervention from Japanese authorities, though the uncertainty over the timing and pace of further interest rate hikes by the Bank of Japan (BoJ) should cap any meaningful appreciating move.
BoJ Governor Kazuo Ueda warned on Friday about the still high uncertainty surrounding the country's recovery prospects and stressed the need to keep a close eye out for the impact of market volatility on the economy. This comes on top of Japanese Prime Minister Shigeru Ishiba's surprise opposition to additional rate hikes and suggests that the BoJ will not rush to tighten its policy further ahead of the general election in Japan on October 27.
This, along with the prevalent risk-on environment, should cap the safe-haven JPY. Meanwhile, expectations that the Federal Reserve (Fed) will proceed with modest interest rate cuts over the next year keep the US Treasury bond yields elevated and limit the US Dollar (USD) corrective decline from over a two-month high. This could further undermine the low-yielding JPY and support prospects for the emergence of dip-buying around the USD/JPY pair.
Daily Digest Market Movers: Japanese Yen draws support from intervention fears, BoJ uncertainty is likely to cap gains
- Japan's top currency diplomat, Atsushi Mimura, warned against speculative trading and said on Friday that authorities are watching FX moves with a high sense of urgency.
- Adding to this, Japan's Deputy Chief Cabinet Secretary Kazuhiko Aoki noted that it is important for currencies to move in a stable manner reflecting economic fundamentals.
- The comments fueled speculations about a possible government intervention to prop up the domestic currency and underpin the Japanese Yen at the start of a new week.
- Bank of Japan Governor Kazuo Ueda said on Friday that the economy was recovering moderately and the underlying inflation is likely to gradually accelerate to the 2% target.
- Ueda added that the central bank must focus on the economic impact of unstable markets and risks from overseas, suggesting the BoJ was in no rush to raise interest rates further.
- Investors cheered the launch of two funding schemes by the People's Bank of China (PBOC) aimed at supporting the development of capital markets, lifting global equity markets.
- The Israeli army launched a series of air strikes across Lebanon and also intensified attacks across Gaza, raising the risk of a further escalation of tensions in the Middle East.
- The yield on the benchmark 10-year US government bond holds above the 4% mark amid bets for a regular 25 basis points rate cut by the Federal Reserve in November.
- The US Dollar stalls its corrective pullback from the highest level touched since early August last Thursday, which, in turn, might act as a tailwind for the USD/JPY pair.
Technical Outlook: USD/JPY could accelerate the corrective decline once the 148.85 horizontal support is broken
From a technical perspective, oscillators on the daily chart are holding in positive territory and warrant caution before placing aggressive bearish bets. That said, weakness below the 149.00 mark and the 148.85 horizontal support could drag the USD/JPY pair further towards the 148.20 region. This is closely followed by the 148.00 round figure, below which the corrective decline could extend further towards the 147.35-147.30 area en route to sub-147.00 levels. That said,
On the flip side, the 149.70-149.75 region now seems to act as an immediate hurdle ahead of the 150.00 psychological mark and the 150.30 area, or the monthly peak touched last week. A sustained strength beyond should pave the way for a move towards the August swing high, around the 150.85-150.90 zone. Some follow-through buying will be seen as a fresh trigger for bullish traders and allow the USD/JPY pair to reclaim the 152.00 before targeting the next relevant hurdle near the 152.70-152.75 area.
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.
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