Japanese Yen drops to fresh low since late July vs USD on fiscal concerns and rate gap

USD/JPY remains on the front foot and draws support from a combination of factors.
Japan’s fiscal woes and the wide US-Japan rate gap continue to undermine the JPY.
Fed hike bets and geopolitical risks benefit the USD, acting as a tailwind for the pair.

Haresh Menghani FXStreet

The USD/JPY pair is seen consolidating near its highest level since July 31, touched during the Asian session on Wednesday, and trading around the 160.25-160.30 region.

A global bond rout pushed the 10-year Japanese government bond (JGB) yield to the historic 3% milestone for the first time since 1996, increasing the cost of servicing Japan's massive debt pile. This comes at a time when Japanese Prime Minister Sanae Takaichi is planning aggressive investment and threatens long-term fiscal stability, which is seen as undermining the Japanese Yen (JPY) and acting as a tailwind for the USD/JPY pair.

Meanwhile, US Treasury Secretary Scott Bessent voiced support for decisive monetary steps to combat the weak Yen, cementing the case for a Bank of Japan (BoJ) rate hike this month. The hawkish outlook, however, fails to impress JPY bulls as borrowing costs in Japan remain significantly lower than in other major economies, including the US. This keeps the JPY carry trade active and further supports the USD/JPY pair.

BoJ faces mounting pressure as US officials urge policy shift

Rabobank’s Jane Foley notes that political scrutiny of the Bank of Japan has intensified, with US Treasury Secretary Bessent stepping up his rhetoric. According to Rabobank, “yesterday he raised the pressure on the BoJ even further, stating that he believes that the BoJ will ‘do the right thing’ on monetary policy, and signalling a strong chance of a rate hike later this month.” Foley argues that such comments underscore how closely markets and policymakers are now watching the BoJ’s next move as Japanese yields edge higher and the Yen remains under pressure.

The US Dollar (USD), on the other hand, continues to attract safe-haven flows amid escalating US-Iran tensions and firming bets of a rate hike by the Federal Reserve (Fed), bolstered by oil-driven inflation fears. This, in turn, validates the near-term positive outlook for the USD/JPY pair. Bulls, however, seem hesitant and opt to wait for the release of the US Nonfarm Payrolls (NFP) report on Friday before placing fresh bets.

USD/JPY 4-hour chart

Technical Analysis

The USD/JPY pair keeps a constructive near-term tone and is now looking to build on the momentum above 160.20, representing the 200-period Simple Moving Average (SMA) on the 4-hour chart. The 61.8% Fibonacci retracement at 160.64 could act as the next upside hurdle, with further barriers at the 78.6% level near 162.10 and the prior swing high around 163.96.

On the downside, initial support is seen at the 200-period SMA at 160.20, ahead of the 50% retracement at 159.62. A break below there would expose the 38.2% level at 158.59 and the deeper 23.6% retracement at 157.32 as subsequent demand zones.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

AUD/USD rises to 0.6950 as USD slips on Fed's Warsh

AUD/USD regains traction and extends the bounce toward 0.6950 in the Asian session on Friday. Fed Chair Warsh's comments reinforce the selling pressure on the US Dollar, allowing the pair to stretch higher. Warsh said that he remains committed to delivering price stability without giving away anything on future interest rate path.

USD/JPY falls in symc with USD, gives up 158.00 after Warsh's speech

USD/JPY has come under fresh selling pressure and gives up 158.00 in the Asian session on Friday amid the emergence of fresh US Dollar selling. Fed Chair Warsh's non-committal commentary on the future tightening path, weighs on the US Dollar and the pair.

Gold looks vacillating above $4,150

Gold alternates gains with losses below the key $4,200 mark per troy ounce on Friday. The yellow metal’s irresolute price action comes in response to a modest pullback in the US Dollar and a tepid recovery in US Treasury yields across the board.

Bitcoin steadies at $82,000: The five forces crushing the Uptober rally

Crypto markets have remained under pressure so far in October, with Bitcoin (BTC) sliding below $80,000 earlier this week before recovering to around $82,000 on Friday, as macroeconomic headwinds and cooling demand weigh on the market.

The Fed just got a second hot inflation number. Here's what the diesel signal is really saying

The Federal Reserve (Fed) faces a renewed inflation challenge after two consecutive reports showed price pressure intensifying across the US economy. September's Consumer Price Index (CPI) confirmed accelerating consumer inflation, while the Producer Price Index (PPI) revealed an even sharper rise in business costs. Behind both reports lies a common factor: energy prices.

Everyone's dumping Gold after hot US inflation. Here's why $4,100 could be a floor, not a cliff

Gold (XAU/USD) is recovering from a sharp sell-off triggered by hotter-than-expected United States (US) inflation data released on Wednesday. The precious metal briefly plunged toward $4,073 as investors increased their bets on further Federal Reserve (Fed) interest rate hikes before recovering as US Treasury yields and the US Dollar (USD) reversed their initial gains.