The USD/JPY pair extends the rally to around 153.05 during the early Asian session on Friday, bolstered by a firmer US dollar (USD). The Greenback edges higher to its highest since February against the Japanese Yen (JPY) amid the lack of progress around the US government shutdown.
The JPY remains under pressure as the newly elected leader of Japan’s ruling party, Sanae Takaichi, failed to instill confidence in the market about the direction of the currency. The surprise election of Takaichi to Japan’s ruling Liberal Democratic Party (LDP) on Saturday raises concerns about an increase in fiscal spending in Japan and prompts traders to reduce bets that the Bank of Japan (BoJ) will hike interest rates this month, which undermines the JPY.
Japan’s Takaichi pushed back against the view that she favors further weakness in the JPY. “I have no intention of triggering an excessively weak yen. But, just as a rule of thumb, I would say there are both merits and demerits to a weak yen,” said Takaichi
The US Senate remained deadlocked on legislation to end the government shutdown on Friday. Traders will closely monitor how long the US federal government shutdown will last. Concerns over the impact of a prolonged US government shutdown on the US economy could exert some selling pressure on the USD.
The preliminary reading of the U-Mich Consumer Sentiment report will take center stage later on Friday, along with the speeches by the Federal Reserve’s (Fed) Goolsbee and Musalem. Any dovish comments from Fed officials could drag the USD lower against the JPY in the near term.
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.
