Japanese Yen bulls seem hesitant amid concerns about fiscal health, ahead of BoJ
- Japanese Yen edges higher against a weaker USD amid intervention fears, hawkish BoJ bets.
- Concerns about Japan’s worsening fiscal condition might keep a lid on meaningful JPY gains.
- Investors might also opt to wait for the outcome of a two-day BoJ policy meeting on Friday.
The Japanese Yen (JPY) remains on the front foot against its American counterpart through the Asian session on Wednesday, although bulls seem hesitant amid mixed fundamental cues. Expectations that Japanese authorities would intervene to counter further weakness in the domestic currency act as a tailwind for the JPY. Adding to this, prospects for further policy tightening by the Bank of Japan (BoJ) and the prevalent risk-off mood offer some support to the safe-haven JPY.
The JPY, however, struggles to gain any meaningful traction as traders opt to wait for the outcome of a two-day BoJ meeting on Friday, for more cues about the timing of the next rate hike. In the meantime, this week's slump in Japanese government bonds (JGB), led by concerns about Japan's fiscal health amid Prime Minister Sanae Takaichi's expansionary policies, keeps a lid on the JPY. This, in turn, warrants caution before placing bullish bets around the USD/JPY pair.
Japanese Yen struggles to lure buyer as fiscal concerns offset supportive factors
- Japan's Finance Minister Satsuki Katayama last week hinted at the possibility of joint intervention with the US to deal with the recent weakness in the Japanese Yen. This, along with hawkish Bank of Japan expectations and sustained safe-haven buying, assists the JPY to gain some positive traction during the Asian session on Wednesday.
- A Bank of Japan survey for December showed on Monday that most Japanese households expect prices to keep rising for the next few years. This comes on top of data released last Friday, which revealed that Japan’s inflation has averaged above the BoJ's 2% target for four straight calendar years, and backs the case for further policy tightening.
- In fact, Reuters reported last week, citing sources, that some BoJ policymakers see scope to raise rates sooner than markets expect, with April a distinct possibility, as a sliding JPY risks adding to already broadening inflationary pressure. Moreover, concerns about Japan's worsening finances led to a sharp rise in the Japanese government bond yields.
- On Monday, Japan's Prime Minister Sanae Takaichi announced plans to hold a snap election in February. With Takaichi's popularity running high, a strong majority for the ruling Liberal Democratic Party (LDP) in the lower house would give her more freedom to pursue her agenda and heighten the chance of more spending and tax cuts after the election.
- Investors gave a thumbs down to Takaichi’s fiscal policies, pushing the yield on the 40-year JGB to a fresh high since its debut in 2007. Adding to this, a fall in demand at the 20-year debt auction opened the floodgates, sending yields into uncharted territory amid a broader selloff in government bonds. This could keep a lid on further JPY gains.
- The US Dollar, on the other hand, struggles to capitalize on the overnight bounce from a two-week low and remains under some selling pressure for the third straight day as renewed trade war fears have revived the 'Sell America' trade. This further weighs on the USD/JPY pair, though traders seem reluctant ahead of a two-day BoJ meeting.
- After raising the overnight interest rate last month to 0.75%, or the highest in 30 years, the BoJ is expected to maintain the status quo on Friday. The focus, meanwhile, remains glued to BoJ Governor Kazuo Ueda's comments during the post-decision press conference on Friday, which will be looked for cues about the timing of the next rate hike.
- Heading into the key central bank event risk, traders will confront the release of the US Personal Consumption Expenditure (PCE) Price Index on Thursday. This will be accompanied by the final US Q3 GDP growth report and offer cues about the US Federal Reserve's rate-cut path, which will drive the USD and influence the USD/JPY pair.
USD/JPY bears have the upper hand while below the 100-hour SMA
The 100-period Simple Moving Average (SMA) slopes lower at 158.17, with the USD/JPY pair holding beneath it, keeping a bearish intraday bias. A recovery above this SMA would ease downside pressure. The Moving Average Convergence Divergence (MACD) and its Signal line are clustered around the zero mark, and a flat histogram suggests limited momentum. The Relative Strength Index (RSI) sits at 48 (neutral), offering little directional edge. Measured from the 159.46 high to the 157.41 low, the 38.2% Fibonacci retracement at 158.19, and the 50% retracement level at 158.43, cap initial rebounds.
While price trades below the 100 SMA, sellers retain the near-term advantage, and rallies would be capped by nearby resistance overhead. A decisive push above the average could open a path toward the next retracement barrier, whereas failure to reclaim it keeps pressure on the one-hour tone. The MACD would need to hold above zero to strengthen an upside reversal, and a turn back into negative territory would reinforce a sluggish backdrop. RSI edging toward 50 would help stabilize, but a drop back through the mid-40s would leave the bias soft.
(The technical analysis of this story was written with the help of an AI tool.)
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
