Japanese Yen retreats from nearly three-month high vs. USD; bullish potential intact
- Japanese Yen struggles to capitalize on its strong gains amid concerns about Japan’s fiscal health.
- The BoJ’s hawkish outlook and intervention fears might continue to act as a tailwind for the JPY.
- The USD hangs near a four-month low amid Fed rate cut bets and might keep a lid on USD/JPY.
The Japanese Yen (JPY) drifts lower during the Asian session on Tuesday, snapping a two-day winning streak and retreating from the highest level since November 2025, touched against its American counterpart the previous day. Investors remain concerned about Japan's fiscal health on the back of Prime Minister Sanae Takaichi's aggressive spending and tax cut plans. This, along with a generally positive risk tone, is seen undermining the safe-haven JPY amid domestic political uncertainty ahead of a snap election on February 8.
However, speculations that Japanese authorities would step in to stem further JPY weakness warrant caution for bearish traders amid the Bank of Japan's (BoJ) hawkish stance. The US Dollar (USD), on the other hand, remains close to a four-month low amid bets that the Federal Reserve (Fed) will lower borrowing costs two more times this year. This, in turn, warrants some before positioning for any meaningful recovery for the USD/JPY pair as the market focus remains glued to the crucial two-day FOMC meeting, starting later today.
Japanese Yen edges lower as fiscal woes, political uncertainty offset intervention fears
- Japan's already strained public finances have come under increased scrutiny after Prime Minister Sanae Takaichi's pledge to suspend sales tax on food items as part of her campaign ahead of a snap lower house election on February 8.
- Nervousness over Japan’s fiscal outlook had been a key factor behind the recent surge in long-dated Japanese government bond (JGBs) yields, which will push up debt servicing costs. This, in turn, caps the upside for the Japanese Yen.
- Data released earlier this Tuesday showed that wholesale inflation in Japan slowed in the year to December. In fact, the Producer Price Index (PPI) climbed 2.4% YoY during the reported month, down from 2.7% rise recorded in November.
- Additional details revealed that Japan's Corporate Service Price Index rose 2.6% YoY in December compared to 2.7% prior. There was nothing in the data to contradict the Bank of Japan's rate-hike path, and it does little to influence the JPY.
- In fact, the BoJ raised its economic and inflation forecasts after leaving short-term interest rates unchanged at the end of a two-day meeting last Friday. The central bank also signaled readiness to continue hiking still-low borrowing costs.
- This marks a significant divergence compared to dovish US Federal Reserve expectations, which keeps the US Dollar on the defensive near a four-month low and supports the JPY amid fears of a potential intervention by Japanese authorities.
- Japan's PM Sanae Takaichi warned on Sunday that officials stand ready to take necessary steps against speculative and highly abnormal market moves following rate checks from Japan’s Ministry of Finance and the New York Fed on Friday.
- Traders, however, seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of a two-day FOMC meeting, starting today. The outcome will drive the USD and the USD/JPY pair in the near term.
USD/JPY shows resilience below 100-day SMA; not out of the woods yet
The USD/JPY pair showed some resilience below the 100-day Simple Moving Average (SMA) on Monday, though it remains below the 154.75-154.80 horizontal support breakpoint. The Moving Average Convergence Divergence (MACD) histogram extends deeper into negative territory, indicating the MACD line below the Signal line and momentum under pressure below zero. The Relative Strength Index (RSI) sits at 32 (near oversold), suggesting downside could be stretched.
A daily close below the 100-day SMA at 153.81, which supports the USD/JPY pair in the near term, would hand bears more control, while sustained trade above it would keep the bias anchored by the rising SMA. A flattening MACD histogram and a move back toward the zero line would hint at momentum stabilization, and an RSI recovery toward 50 would improve tone; conversely, a drop into sub-30 would risk further weakness.
(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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
