The USD/JPY pair edges higher to around 156.85 during the early Asian session on Tuesday. Fiscal concerns and the Bank of Japan (BoJ) rate hike uncertainty exert some selling pressure on the Japanese Yen (JPY) against the US Dollar (USD). Later on Tuesday, the US ADP Employment Change Weekly, Retail Sales, and Producer Price reports will be in the spotlight.
The JPY remains weak due to market expectations of increased government spending under Japan’s Prime Minister Sanae Takaichi. Takaichi approved a 21.3 trillion Yen ($135.4 billion) economic stimulus program last week, per Reuters. The package includes 17.7 trillion Yen in general account outlays, surpassing the previous year’s 13.9 trillion Yen and is the largest stimulus since the COVID epidemic. It will also bring tax cuts worth 2.7 trillion yen. These policies raise worries about Japan’s worsening fiscal health and drag the Japanese Yen lower.
Additionally, the expectations that the Bank of Japan (BoJ) would delay raising interest rates amid political resistance to an early policy tightening and Takaichi’s pro-stimulus stance might contribute to the JPY’s downside. A Reuters poll showed last week that a narrow majority of economists expect the Japanese central bank to raise rates to 0.75% in December, while many market players previously anticipated a hike in either December or January.
The downside for the Japanese Yen might be limited, as Japanese authorities warned of potential currency intervention. Japan’s Finance Minister Satsuki Katayama said that Japan sees intervention in the foreign exchange market as a possibility in dealing with excessively volatile and speculative moves in the JPY.
Investors continued to pencil in further interest rate cuts by the Federal Reserve (Fed). Fed Governor Christopher Waller delivered a dovish remark on Monday, saying that available data showed the US job market remains weak enough to warrant another quarter-point rate cut at the US central bank’s December meeting. This, in turn, might undermine the Greenback against the JPY. Fed fund futures have increased the probability of an interest rate cut of a quarter-point next month to 80%, up from 30% before the Fed’s remarks, according to the CME FedWatch tool.
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.
