Japanese Yen builds on strong gains vs. a weaker USD amid divergent BoJ-Fed
- The Japanese Yen scales higher against a weaker USD for the second straight day.
- Intervention fears and BoJ rate hike bets benefit the JPY amid geopolitical risks.
- Dovish Fed expectations undermine the USD and also exert pressure on USD/JPY.
The Japanese Yen (JPY) scales higher against a broadly weaker US Dollar (USD) for the second straight day on Tuesday and has now reversed a major part of the post-Bank of Japan (BoJ) decline last week. Japan's Finance Minister Satsuki Katayama's stronger intervention language turns out to be a key factor that provides a goodish lift to the JPY. Moreover, rising geopolitical tensions contribute to driving safe-haven flows toward the JPY amid the year-end thin liquidity.
Meanwhile, the BoJ left the door open to further tightening. This marks a significant divergence in comparison to rising bets for more rate cuts by the US Federal Reserve (Fed) in 2026 and contributes to the lower-yielding JPY's outperformance. Apart from dovish Fed expectations, concerns about the US central bank's independence and long-term policy credibility drag the USD to a one-week low, which, in turn, is seen exerting additional downward pressure on the USD/JPY pair.
Japanese Yen bulls retain control amid intervention fears, hawkish BoJ, safe-haven demand
- Japan’s Finance Minister Satsuki Katayama, in her strongest warning yet, said that authorities have a free hand to take bold action against speculative moves that are not aligned with economic fundamentals. This comes after Atsushi Mimura, Japan’s top foreign exchange official, warned on Monday of appropriate action against an excessive decline in the Japanese Yen.
- Meanwhile, an escalation of tensions between the United States and Venezuela, along with the protracted Russia-Ukraine war and renewed Israel-Iran conflict, keeps the geopolitical risks in play. This further drives safe-haven flows toward the JPY and contributes to its relative outperformance against its American counterpart for the second consecutive day on Tuesday.
- The yield on the benchmark 10-year Japanese government bond touched a 26-year high amid firming expectations for further rate increases by the Bank of Japan after the central bank raised its rate to the highest in three decades last Friday.
- In fact, BoJ Governor Kazuo Ueda reiterated during the post-meeting press conference to seek further rate hikes if the economy and prices develop in line with the bank’s projections, saying the likelihood of achieving its outlook is increasing.
- In contrast, traders have been pricing in a greater chance of two more interest rate cuts by the US Federal Reserve in 2026. This, in turn, exerts downward pressure on the US Dollar and contributes to the offered tone surrounding the USD/JPY pair.
- US Treasury Secretary Scott Bessent floated the idea that the new Fed chair could scrap the dot plot and also change the central bank's inflation framework and communications. This adds to uncertainty around Fed credibility and weighs on the USD.
- Traders now look to Tuesday's US economic data – the delayed release of the Q3 GDP report and Durable Goods Orders – for a short-term impetus. The focus will then shift to the Tokyo CPI on Friday, which would drive the JPY in the near term.
USD/JPY seems vulnerable as intraday break below 50% Fibo. comes into play
This week's failure near the 158.00 neighborhood constitutes the formation of a bearish double-top pattern. Moreover, an intraday breakdown below the 38.2% Fibonacci retracement level of last week's move higher favors the USD/JPY bears and backs the case for further losses. Short-term moving averages have flattened after the recent setback, tempering upside traction.
The Moving Average Convergence Divergence (MACD) line slips below the signal line with both hovering around the zero mark, and the histogram turns negative, suggesting fading bullish momentum. The RSI sits at 47.40 (neutral) after retreating from overbought. Measured from the 154.39 low to the 157.71 high, the 50% retracement at 156.05 offers nearby support. A hold above the latter could keep the pullback contained.
Moving averages would need to reassert a positive slope to restore bullish momentum, otherwise the pair risks further consolidation. Should weakness extend, the MACD’s negative histogram would likely widen, and the RSI could slip toward 40, reinforcing a softer tone. Measured from the 154.39 low to the 157.71 high, a break under the 50% retracement at 156.05 would expose the 61.8% retracement at 155.66. Conversely, a recovery through 156.44 could open room toward the 23.6% retracement at 156.93.
(The technical analysis of this story was written with the help of an AI tool)
Bank of Japan FAQs
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%.
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.
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.
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.
