The USD/JPY pair gains momentum to around 155.85 during the early Asian trading hours on Wednesday. The Japanese Yen (JPY) weakens against the US Dollar (USD) amid political uncertainty in Japan. The Bureau of Labor Statistics (BLS) will not publish the January employment report on Friday as scheduled due to the partial government shutdown that began on Saturday.
Markets brace for heightened volatility ahead of a snap general election on Sunday. Meanwhile, fiscal concerns on the back of Japanese Prime Minister Sanae Takaichi’s reflationary policies could undermine the JPY against the USD. Takaichi has pledged to suspend the consumption tax on food for two years if her Liberal Democratic Party wins the snap election.
Markets remain alert for potential intervention from Japanese authorities. Japan’s Finance Minister Satsuki Katayama said on Tuesday that she will continue to closely coordinate with US authorities as needed, based on a joint Japan and US statement issued in September last year, and respond appropriately. Intervention fears could boost the Japanese Yen and act as a headwind for the pair in the near term.
On the other hand, shifting expectations for US Federal Reserve (Fed) leadership could support the Greenback. US President Donald Trump nominated former Fed Governor Kevin Warsh to serve as the next Chairman of the US central bank. Traders anticipate a slower pace of interest rate cuts under his tenure and a focus on shrinking the Fed’s balance sheet.
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.
