Japanese Yen dips amid political turmoil, BoJ-Fed divergence could curb USD/JPY gains

The Japanese Yen (JPY) attracts some sellers heading into the European session on Thursday and touches a three-day low against a broadly firmer US Dollar (USD) in the last hour. Political uncertainty gripped Japan following Prime Minister Shigeru Ishiba's resignation, which could temporarily hinder the Bank of Japan (BoJ) from normalising its monetary policy. This, along with a generally positive risk tone, undermines the safe-haven Japanese Yen and lifts the USD/JPY pair closer to the 147.75 hurdle.

Meanwhile, a slight increase in Japan's Producer Prices Index (PPI) in August, along with an upward revision of the Q2 GDP print, a rise in household spending and real wages, backs the case for an imminent BoJ rate hike. In contrast, traders have been pricing in the possibility of a more aggressive policy easing by the US Federal Reserve (Fed). This, in turn, could limit any further USD appreciation and benefit the lower-yielding JPY, warranting caution for the USD/JPY bulls ahead of the US consumer inflation.

Japanese Yen is undermined by a combination of factors; downside seems limited

• A report released by the Bank of Japan this Thursday showed that Japan's producer price index (PPI) climbed by 2.7% in August compared to the same time period last year, marking a slight increase from 2.6% in the previous month. On a monthly basis, the PPI edged down 0.2%, reversing a 0.2% rise in July.
• This follows the Reuters Tankan poll on Wednesday, which indicated that Japanese manufacturers' sentiment was its best in more than three years in September. Moreover, Japan's revised GDP print earlier this week showed that the economy expanded at an annualised pace of 2.2% in Q2 2025.
• Other data released recently pointed to a rise in household spending and positive real wages for the first time in seven months. This keeps the door open for an imminent BoJ interest rate hike by the year-end, which continues to act as a tailwind for the Japanese Yen through the Asian session on Thursday.
• In contrast, a surprise pullback in US inflation underpinned bets that the Federal Reserve will lower interest rates at its policy meeting next week. The US Bureau of Labor Statistics (BLS) reported on Wednesday that the US PPI declined to 2.6% on a yearly basis in August from 3.3% in the previous month.
• Other details of the report showed that the core PPI, which excludes food and energy prices, increased 2.8% on a yearly basis, marking a sharp deceleration from 3.7% in July and missing consensus estimates of 3.5% by a wide margin. The data lifted bets for a more aggressive policy easing by the Fed.
• The markets have now almost fully priced in three rate cuts for the rest of the year and also see a small possibility of a jumbo 50-basis-point rate cut at the September 16-17 meeting. This, in turn, fails to assist the US Dollar in capitalizing on this week's bounce from its lowest level since July 28.
• Traders, however, seem reluctant to place aggressive bets and opt to wait for the release of the US Consumer Price Index (CPI) report later during the North American session. The crucial inflation data will play a key role in driving the USD and provide some meaningful impetus to the USD/JPY pair.

USD/JPY might struggle to climb beyond 148.00; 200-day SMA holds the key for bulls

The USD/JPY pair's inability to build on this week's goodish rebound from the vicinity of the August monthly swing low and negative oscillators on the daily chart favors bearish traders. Some follow-through selling and acceptance below the 147.00 mark will reaffirm the outlook, which, in turn, should pave the way for a fall towards retesting the 146.30-146.20 support zone. Some follow-through selling, leading to a subsequent breakdown through the 146.00 mark, could drag spot prices to the 145.35 intermediate support en route to the 145.00 psychological mark.

On the flip side, any attempted move up is more likely to attract fresh sellers near the 147.75-147.80 region, which should cap the USD/JPY pair near the 148.00 round figure. A sustained strength beyond the latter, however, might trigger a short-covering rally towards challenging the very important 200-day Simple Moving Average (SMA), currently pegged near the 148.75 zone. This is closely followed by the 149.00 mark and the monthly swing high, around the 149.15 region, which, if cleared decisively, might shift the bias in favor of bulls.