- 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) dives to a fresh three-month low against its American counterpart during the Asian session on Monday as the loss of a parliamentary majority for Japan’s ruling coalition fuels uncertainty about the Bank of Japan’s (BoJ) rate-hike plans. Apart from this, a generally positive risk tone is seen as another factor undermining the JPY’s safe-haven status, which, along with sustained US Dollar (USD) buying, lifts the USD/JPY pair further beyond the mid-153.00s.
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. Adding to this, the 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 continues to underpin the Greenback and further contributes to the offered tone surrounding the lower-yielding JPY.
Daily Digest Market Movers: Japanese Yen slumps after ruling coalition loses majority in election
- 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 remains on track to climb further, overbought RSI warrants caution
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.
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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