Japanese Yen slides to nearly two-week low vs. USD amid fiscal and political concerns
- Japanese Yen remains depressed, as fiscal concerns and political uncertainty offset the upbeat data.
- Intervention fears and the BoJ’s hawkish tilt might hold back the JPY bears from placing fresh bets.
- Expectations for more Fed easing act as a headwind for the USD and should cap the USD/JPY pair.
The Japanese Yen (JPY) continues with its relative underperformance on Wednesday amid concerns about Japan's fiscal health under Prime Minister Sanae Takaichi's expansionary spending policy. Apart from this, domestic political uncertainty ahead of the snap election on February 8 turns out to be another factor undermining the JPY. This, along with a modest US Dollar (USD) uptick, lifts the USD/JPY pair above the 156.00 mark, or a nearly two-week high, during the Asian session.
Meanwhile, traders remain on high alert amid the possibility of a coordinated Japan-US intervention to stem the JPY's decline. Moreover, the Bank of Japan's (BoJ) gradual policy tightening narrative might hold back the JPY bears from placing aggressive bets. Apart from this, bets that the US Federal Reserve (Fed) will lower borrowing costs two more times keep the USD bulls on the defensive and should contribute to capping the USD/JPY pair ahead of the US macro data, due later today.
Japanese Yen continues to be weighed down by worries about Japan’s fiscal health under PM Takaichi
- Japan’s services sector growth accelerated at the start of 2026, with business activity expanding for the tenth consecutive month and at its fastest pace in almost a year. In fact, the Jibun Bank Services PMI climbed to 53.7 compared to 51.6 in December and consensus estimates for a reading of 53.4.
- The data signaled a more durable recovery in the services sector, which accounts for roughly 70% of Japan’s GDP. The market reaction, however, turns out to be muted amid nervousness over Japan’s fiscal outlook, fueled by Prime Minister Sanae Takaichi’s aggressive spending and tax cut plans.
- In fact, Takaichi has pledged to suspend the 8% consumption tax on food for two years as part of her campaign ahead of a snap lower house election on February 8. This puts the spotlight back on Japan's already strained public finances, which continue to undermine the Japanese Yen on Wednesday.
- The unusual rate check by the New York Federal Reserve recently was seen as the strongest signal to date that Japanese and US authorities were working together to stem the JPY's decline. This lowers the threshold for intervention and could limit JPY losses amid hawkish Bank of Japan bets.
- The Summary of Opinions from the BoJ's January meeting, released on Monday, showed that policymakers debated mounting price pressures from a weak JPY. Moreover, board members judged that further rate increases were appropriate over time, which could lend support to the JPY.
- The US Dollar, on the other hand, struggles to build on last week's recovery from a four-year low, bolstered by the nomination of Kevin Warsh as the next Fed chair. Even the passage of the government funding package to end a partial shutdown does little to provide any impetus to the USD.
- Traders now look forward to the release of the US ADP report on private-sector employment and the US ISM Services PMI. Apart from this, comments from influential FOMC members might influence the USD demand amid bets for two more rate cuts in 2026 and drive the USD/JPY pair.
USD/JPY might struggle to make it through 156.50-156.55 confluence resistance
Wednesday's move beyond the 156.00 mark comes on top of the overnight breakout through the 50% retracement level of the 159.13-152.06 downfall and favors the USD/JPY bulls. The Relative Strength Index (14) sits at 66.9, below overbought, aligning with a firm but maturing advance.
However, the Moving Average Convergence Divergence (MACD) histogram remains positive but is contracting, suggesting fading bullish momentum. The MACD line stands above the Signal line, and both hover around the zero line, reinforcing a cautious, transitional tone.
Hence, any subsequent move up is more likely to confront stiff resistance near the 156.51 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 61.8% Fibonacci retracement level. A sustained break above the said barrier is needed to shift the near-term tone to the upside.
A clearance would open the 78.6% retracement at 157.62, while failure to overcome that barrier would leave the recovery vulnerable to renewed pullbacks. Meanwhile, the USD/JPY pair holds beneath the downward sloping 100-period SMA, suggesting that the move higher is likely to remain capped.
(The technical analysis of this story was written with the help of an AI tool.)
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
