USD/JPY Forecast: Bulls retain control as fiscal concerns, BoJ uncertainty undermine JPY

The USD/JPY pair attracts some dip-buyers at the start of a new week and, for now, seems to have stalled its retracement slide from the vicinity of the 158.00 round-figure mark, or the highest level since mid-January touched last Thursday. The Japanese Yen (JPY) continues with its relative underperformance amid concerns about Japan's ailing fiscal position and the uncertainty over the Bank of Japan's (BoJ) policy tightening path. This, along with a generally positive risk tone, undermines the safe-haven JPY and acts as a tailwind for the currency pair.

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 fueled anxiety about the supply of new government debt, which had been a key factor behind the recent steepening of Japan's yield curve and keeps the JPY bulls on the defensive.

Moreover, data released last week showed that Japan's economy contracted in Q3 for the first time in six quarters. This could put additional pressure on the Bank of Japan (BoJ) to delay raising interest rates and further weigh on the JPY. Adding to this, the risk-on impulse, bolstered by renewed bets that the US Federal Reserve (Fed) will lower borrowing costs again in December, dents the JPY's safe-haven status. This offsets subdued US Dollar (USD) price action and remains supportive of the USD/JPY pair's bid tone through the first half of the European session.

New York Fed President John Williams described the current policy as modestly restrictive and told reporters on Friday that he sees room for the central bank to lower rates in the near term. Traders were quick to react and are now pricing in around a 67% chance that the Fed will cut interest rates next month. However, other Fed officials maintained a hawkish stance, with Dallas Fed President Lorie Logan calling for leaving the policy rate on hold for the time being. This helps limit the downside for the USD and further offers support to the USD/JPY bulls.

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. In fact, a Reuters poll showed that a slim majority of economists expect the BoJ to raise rates to 0.75% in December. Adding to this, speculations that Japanese authorities would step in to stem any further JPY weakness might hold back the USD/JPY bulls from placing fresh bets.

Japan's Finance Minister Satsuki Katayama issued the strongest warning to date and said last Friday that the government will take appropriate action as needed against excess volatility and disorderly market moves. Katayama also signaled the chances of intervention. Furthermore, 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. This, in turn, warrants some caution before positioning for deeper JPY losses and a further appreciating move for the USD/JPY pair.

Traders now look forward to this week's important US macro releases for more cues about the Fed's rate-cut path. The US Producer Price Index (PPI) and Retail Sales data, along with the Conference Board's Consumer Confidence Index, are due to be published on Tuesday. This will be followed by the preliminary Q3 GDP print and the Personal Consumption Expenditure (PCE) Price Index report on Wednesday. The latter will play a key role in influencing the near-term USD price dynamics and help in determining the next leg of a directional move for the USD/JPY pair.

USD/JPY 4-hour chart

Technical Outlook

A subsequent strength beyond the 157.00 mark could lift the USD/JPY pair towards the 157.45-157.50 intermediate hurdle en route to the 158.00 neighborhood, or an over ten-month peak touched last week. Some follow-through buying 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 could offer immediate support ahead of the 156.00 mark, below which the USD/JPY pair could drop to the 155.45-155.40 intermediate support en route to the 155.00 psychological mark. Any further slide is more likely to attract fresh buyers near the 154.50-154.45 horizontal resistance breakpoint, which should act as a key pivotal point.