Japanese Yen bulls have the upper hand amid intervention fears, hawkish BoJ, safe-haven demand
|- Japanese Yen struggles to capitalize on modest intraday gains amid talks of a snap election in Japan.
- Intervention fears, BoJ rate hike bets, geopolitical risks, and trade war concerns could support the JPY.
- The emergence of fresh USD selling might contribute to capping any attempted USD/JPY recovery.
The Japanese Yen (JPY) surrenders a major part of its intraday gains to over a one-week high, touched against a broadly weaker US Dollar (USD) earlier this Monday, and hangs near the daily low heading into the European session. Speculations that Prime Minister Sanae Takaichi may soon call a snap election to cement her authority and further boost the expansionary fiscal policy act as a headwind for the JPY. However, a warning of a possible intervention by Japan's Finance Minister Satsuki Katayama, to counter weakness in the domestic currency, might continue to act as a tailwind for the JPY.
Furthermore, prospects for an early interest rate hike by the Bank of Japan (BoJ) should contribute to limiting losses for the JPY. Meanwhile, US President Donald Trump vowed on Saturday to impose tariffs on eight European countries that have opposed his plan to take Greenland, reigniting trade war concerns. This, along with heightened geopolitical tensions, tempers investors' appetite for riskier assets and could offer additional support to the safe-haven JPY. The USD, on the other hand, retreats from its highest level since December 9. This warrants some caution before confirming that the USD/JPY pair's pullback from the 18-month top, touched last week, has run its course and positioning for any further recovery.
Japanese Yen bulls turn cautious as political uncertainty offsets safe-haven flows, intervention fears
- Japan’s Finance Minister Satsuki Katayama said on Friday that all options, including a direct and coordinated intervention with the US, are being considered to address the recent weakness in the Japanese Yen.
- A Reuters report, citing sources, suggests that some policymakers inside the Bank of Japan see scope to raise interest rates sooner than markets currently expect, as early as April, further lending support to the JPY.
- US President Donald Trump threatened to slap a 10% tariff on goods from eight European countries starting from February 1, until the US is allowed to buy Greenland, triggering a fresh wave of the risk-aversion trade.
- European Union ambassadors reached a broad agreement on Sunday to intensify efforts to dissuade Trump from imposing levies on allies, while also preparing retaliatory measures should the duties go ahead.
- Moreover, geopolitical risks stemming from the protracted Russia-Ukraine war and lingering worries about a possible US military strike against Iran benefit the JPY's safe-haven status at the start of a new week.
- The US Dollar attracts heavy selling as fresh trade war fears trigger a crisis of confidence in US assets, which offsets reduced bets for two more interest rate cuts by the US Federal Reserve by the end of this year.
- Reports suggest that Japan's Prime Minister Sanae Takaichi plans to dissolve parliament and call a snap parliamentary election in the first half of February to seek public backing for her fiscally expansionist policies.
- With Takaichi's popularity running high, a win would bolster her coalition government’s parliamentary majority and cement her authority to pursue her spending plans, which warrants caution for the JPY bulls.
- Traders might also opt to wait for the release of the US Personal Consumption Expenditure (PCE) Price Index on Thursday and the crucial BoJ monetary policy decision on Friday before placing fresh directional bets.
USD/JPY needs to surpass 158.15-158.20 or 38.2% Fibo. to back case for further recovery
The USD/JPY pair finds decent support near the 61.8% Fibonacci retracement level of the recent move up from the monthly peak. A subsequent strength beyond the 50% retracement level, around the 157.80 area, could pave the way for further gains, though a stronger recovery would need additional momentum confirmation.
The Moving Average Convergence Divergence (MACD) hovers just below the zero line as readings firm toward -0.01, suggesting fading bearish pressure. The Relative Strength Index (RSI) prints 43 (neutral-bearish), stabilizing after an earlier oversold dip.
Meanwhile, the USD/JPY pair trades below the flattening 100-hour Simple Moving Average (SMA), around the 158.55 region, which should cap rebounds. A close back above this average would tilt the near-term tone higher.
(The technical analysis of this story was written with the help of an AI tool.)
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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