The USD/JPY pair extends the rally to around 156.85 during the early Asian session on Thursday. The Japanese Yen (JPY) weakens to a two-week low against the US Dollar (USD) amid concern over Japan’s fiscal health under Prime Minister Sanae Takaichi’s expansionary spending policy. Traders will closely monitor Japan’s snap elections scheduled for Sunday.
Takaichi’s ruling Liberal Democratic Party (LDP) is expected to gain more seats in the national election as she seeks voter backing for increased spending, tax cuts, and a new security strategy. Her expansionary fiscal policies raise concerns about Japan’s fiscal outlook, due to fears of debt-funded spending, which drags the JPY lower and creates a tailwind for the pair.
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 USD’s front, US President Donald Trump on Friday nominated Kevin Warsh to succeed Jerome Powell as the next Chairman of the US Federal Reserve (Fed). Expectations that Trump’s pick to head the US central bank would favour maintaining elevated interest rates could boost the Greenback 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.
