Japanese Yen remains on the back foot against a softer USD; upside potential seems limited

The Japanese Yen (JPY) recovers slightly against a mildly softer US Dollar (USD), though sticks to a negative bias through the Asian session on Monday amid concerns about Japan's ailing fiscal position. Furthermore, the growing acceptance that the Bank of Japan (BoJ) would delay raising interest rates amid political resistance to an early policy tightening and Prime Minister Sanae Takaichi’s pro-stimulus stance continue to undermine the JPY.

Apart from this, a generally positive risk tone is seen as another factor weighing on the safe-haven JPY. However, speculations that Japanese authorities could step in to stem any further JPY weakness hold back bearish traders from placing aggressive bets. The USD, on the other hand, struggles to capitalize on last week's up to the highest level since late May amid mixed signals from the US Federal Reserve (Fed) officials and contributes to capping the USD/JPY pair.

Japanese Yen is undermined by fiscal concerns, BoJ uncertainty, positive risk tone

• 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 amplifies concerns about Japan's ailing fiscal position and fuels worries about the supply of new government debt, which keeps Japan’s borrowing costs close to the highest level in decades. Moreover, data released last week showed that Japan's economy contracted in Q3 for the first time in six quarters, putting additional pressure on the Bank of Japan (BoJ) to delay raising interest rates.
• Apart from this, the upbeat market mood prompts fresh selling around the safe-haven Japanese Yen during the Asian session on Monday amid relatively thin liquidity on the back of a holiday in Japan. The US Dollar, on the other hand, stands firm near its highest level since late May as traders have been scaling back their bets for another interest rate cut by the US Federal Reserve in December.
• In fact, minutes from the October FOMC meeting, released last Wednesday, showed that policymakers cautioned that cutting interest rates further could risk entrenched inflation. Moreover, the better-than-expected release of the delayed US Nonfarm Payrolls report for September eases concerns about the softening labor market conditions and validates less dovish Federal Reserve (Fed) expectations.
• 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. A Reuters poll showed that a slim majority of economists expect the BoJ to raise rates to 0.75% in December.
• Japan's Finance Minister Satsuki Katayama, in the strongest warning to date, said on Friday that we will take appropriate action as needed against excess volatility and disorderly market moves, and also signaled chances of intervention. Adding to this, 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.

USD/JPY bullish potential seems intact while above the 156.00 pivotal support

A subsequent strength beyond the 157.00 mark could lift the USD/JPY pair further towards the 157.45-157.50 intermediate hurdle en route to the 157.85-157.90 region, or an over ten-month peak touched last week. Some follow-through buying beyond the 158.00 round figure 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 now seems to have emerged as an immediate support. This is followed by the 156.00 mark, which, if broken decisively, might prompt some technical selling and drag the USD/JPY pair to the 155.45-155.40 intermediate support en route to the 155.00 psychological mark. Any further decline is more likely to find decent support and attract fresh buyers near the 154.50-154.45 horizontal resistance breakpoint. The latter should act as a key pivotal point and as a strong near-term base for spot prices.