Japanese Yen selling remains unabated; USD/JPY rallies to July 2024 high

Japanese Yen extends its descending trend and is pressured by a combination of factors.
BoJ uncertainty, Japan-China rift, and talks of a snap election in Japan undermine the JPY.
Intervention fears might cap USD/JPY amid a subdued USD, ahead of the US CPI report.

Haresh Menghani FXStreet

The Japanese Yen (JPY) selling bias remains unabated through the Asian session, which, along with a modest US Dollar (USD) uptick, lifts the USD/JPY pair to the 159.00 neighborhood, or the highest level since July 2024. Reports that Prime Minister Sanae Takaichi may soon call a snap election to take advantage of strong approval ratings fueled speculation for more expansionary fiscal policy. Adding to this, the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ), the deepening Japan–China diplomatic crisis, and a positive risk tone continue to undermine the safe-haven JPY.

Meanwhile, the recent JPY decline might prompt some verbal intervention from Japanese authorities, which, in turn, warrants some caution for bearish traders. The USD, on the other hand, seems to struggle to attract meaningful buyers amid concerns about the US Federal Reserve's (Fed) independence, and also keep a lid on the USD/JPY pair. Investors might also opt to wait for the release of the US consumer inflation figures, due later today, for more cues about the Fed's rate-cut path. This, in turn, will play a key role in influencing the near-term USD price dynamics and determining the trajectory for the currency pair.

Japanese Yen continues to be pressured by political risks, BoJ rate hike doubts

Reports suggest that Japan's Prime Minister Sanae Takaichi may call an early election in the first half of February to bolster her coalition government’s parliamentary majority, fueling hopes for additional stimulus.
Last week, China prohibited some rare earth elements from being exported to Japan with immediate effect. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers.
Despite the Bank of Japan's (BoJ) hawkish outlook, investors remain uncertain about the likely timing of the next rate hike. This, along with the risk-on impulse, is seen undermining demand for the safe-haven Japanese Yen.
Japan’s Finance Minister Satsuki Katayama said this Tuesday that she shared concerns over the JPY's recent one-sided decline with US Treasury Secretary Scott Bessent and added that the tolerance for weakness was limited.
Concerns about the Federal Reserve's independence resurfaced on Monday after prosecutors opened a criminal investigation against Jerome Powell over his testimony about the central bank building renovation project.
Powell, in a rate statement, called the probe unprecedented and said that he believed it was opened due to US President Donald Trump's anger over the Fed's refusal to cut interest rates despite repeated public pressure.
This keeps the US Dollar bulls on the defensive despite firming expectations for a less aggressive monetary policy easing by the US central bank this year, bolstered by the latest monthly employment details released last Friday.
Traders are pricing in the possibility of two more rate cuts by the Fed in 2026. This marks a significant divergence compared to expectations that the BoJ will stick to its policy normalization path and should cap the USD/JPY pair.
BoJ Governor Kazuo Ueda reiterated last week that the central bank would continue to raise interest rates if economic and price developments move in line with forecasts, leaving the door open for further policy tightening.
Investors might also refrain from placing aggressive directional bets and opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain glued to the release of the latest US consumer inflation figures.

USD/JPY seems poised to appreciate further amid bullish technical setup

The 50-day Simple Moving Average (SMA) continues to rise, with the USD/JPY pair holding above it, reinforcing a firm bullish bias. The SMA, around the 156.00 mark, offers nearby dynamic support as buyers retain control. The Moving Average Convergence Divergence (MACD) shows a bullish crossover near the zero line, with the histogram turning positive and momentum improving.

The Relative Strength Index (RSI) stands at 67.47, strong but not overbought, supporting the upside while leaving room before stretched conditions emerge. As long as USD/JPY holds above its rising SMA, pullbacks would remain contained, and the pair could extend higher; a close back below the average would hint at waning momentum and a move into consolidation.

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

Bank of Japan FAQs

What is the Bank of Japan?

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%.

What has been the Bank of Japan’s policy?

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.

How do Bank of Japan’s decisions influence the Japanese Yen?

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.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

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.

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