Japanese Yen recovers a part of overnight losses against USD, upside seems limited

The Japanese Yen edges higher against the USD, though it lacks bullish conviction.
The uncertainty over the BoJ’s rate-hike plan and a positive risk tone caps the JPY.
Bets for smaller Fed rate cuts could underpin the USD and limit losses for USD/JPY.

The Japanese Yen (JPY) ticks higher against its American counterpart during the Asian session on Thursday and reverses a part of the overnight losses back closer to the lowest level since early August. Any meaningful JPY appreciation, however, still seems elusive amid the uncertainty over the Bank of Japan's (BoJ) rate-hike path. A fall in Japan's exports for the first time in 10 months raised concerns about weakness in global demand. This comes on top of a surprise opposition to further rate hikes from Japan's Prime Minister Shigeru Ishiba and may complicate the BoJ's plans to exit years of ultra-easy monetary policy.

Apart from this, the prevalent risk-on environment might contribute to capping the upside for the safe-haven JPY. Furthermore, expectations that the Federal Reserve (Fed) will proceed with modest interest rate cuts over the next year continue to act as a tailwind for the US Treasury bond yields and keep the US Dollar (USD) well supported near its highest level in more than two months. This could further undermine the low-yielding JPY and support prospects for the emergence of some dip-buying around the USD/JPY pair. Traders now look forward to the US macro releases for short-term impetus later this Thursday.

Daily Digest Market Movers: Japanese Yen might struggle to build on its strength amid BoJ rate-hike uncertainty

According to a Reuters poll, a slim majority of economists expect that the Bank of Japan will forgo raising interest rates again this year amid uncertainty over the new political leadership's preference for the monetary policy.
Data published by Japan's Ministry of Finance on Thursday showed that total exports in September dropped 1.7% from a year earlier as compared to a revised 5.5% rise in the previous month and missing consensus estimates.
Soft demand in China – Japan's biggest trading partner – and a slowing US growth, along with the JPY's recent appreciation following the BoJ’s unexpected interest rate hike in late July, pushed down the value of exports.
This could further complicate the BoJ's rate-hike plans and cap any meaningful appreciating move for the JPY, though persistent geopolitical risks stemming from the ongoing conflicts in the Middle East might offer support.
The United Nations (UN) said that Israeli forces have fired at its peacekeeping position, forcibly entered a base, stopped a critical logistical movement, and injured more than a dozen of its troops in southern Lebanon.
According to a source familiar with the matter, Israel’s plan of a counterstrike in response to Iran’s October 1 attack is ready, raising the risk of a further escalation of tensions in the Middle East and a broader regional war.
The US Dollar rose to its highest level since early August on Wednesday amid firming expectations for a less aggressive policy easing by the Federal Reserve and bets for a 25 basis points rate cut at the November meeting.
The yield on the benchmark 10-year US government bond dropped to over a one-week low on Wednesday, albeit it defends the 4.0% threshold, which favors the USD bulls and should offer support to the USD/JPY pair.
Traders look to the US economic docket – featuring the release of monthly Retail Sales, Weekly Initial Jobless Claims and the Philly Fed Manufacturing Index – for some impetus later during the North American session.

Technical Outlook: USD/JPY consolidates in a familiar range before the next leg up, move beyond 150.00 awaited

From a technical perspective, the USD/JPY pair has been oscillating in a familiar range since the beginning of this week. Against the backdrop of the recent rise from a 14-month low touched in September, this might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding in positive territory and are still away from being in the overbought zone, supporting prospects for an eventual breakout to the upside. That said, it will still be prudent to wait for a sustained strength above the 150.00 psychological mark before placing fresh bullish bets. Spot prices might then accelerate the move up towards the August monthly swing high, around the 150.85-150.90 region. Some follow-through buying beyond the 151.00 round figure will be seen as a fresh trigger for bullish traders and pave the way for further near-term appreciation.

On the flip side, the 149.00 mark, representing the lower boundary of the short-term trading range, might continue to protect the immediate downside. A convincing break below has the potential to drag the USD/JPY pair to the next relevant support near the 148.55 region en route to the 148.00 round figure and last week's swing low, around the 147.35-147.30 area. The latter is followed by the 147.00 mark, which if broken decisively will suggest that the recent move-up witnessed over the past month or so has run its course and prompt aggressive technical selling.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.