The Japanese Yen (JPY) has recovered a significant portion of its early Asian session losses, pushing the USD/JPY pair back toward the mid-150.00s level in Monday’s European trading hours.
The rebound comes as the US Dollar (USD) faces broad-based weakness, weighed down by dovish Federal Reserve (Fed) expectations and rising concerns about the ongoing US government shutdown. In this article, Servelius brokers take a deep dive into the key aspects of the topic.
At the same time, recent comments from Bank of Japan (BoJ) officials have reinforced expectations that the central bank remains on its policy normalization path, hinting at the potential for another interest rate hike by year-end.
This hawkish outlook provided modest support to the Yen, which also benefited from safe-haven flows amid heightened geopolitical tensions and persistent US-China trade friction.
Political Landscape: LDP and Ishin Form Coalition, Fiscal Concerns Intensify
Market participants are closely watching the evolving political scene in Tokyo, as Kyodo News reported that Japan’s ruling Liberal Democratic Party (LDP) and the Japan Innovation Party (JIP), commonly known as Ishin, are set to form a coalition government. The alliance paves the way for Sanae Takaichi to become Japan’s first female Prime Minister, with a parliamentary vote scheduled for Tuesday.
Takaichi’s anticipated leadership is widely seen as an endorsement of Abenomics-style policies, which favor aggressive fiscal spending and monetary stimulus to support economic growth. Her alignment with former Prime Minister Shinzo Abe’s economic strategy has prompted speculation that the government could embark on expansive fiscal programs, potentially increasing Japan’s already high public debt burden.
BoJ-Fed Policy Divergence: A Key Limiting Factor for JPY Upside
The divergence in monetary policy trajectories between the BoJ and the Fed continues to play a defining role in the USD/JPY outlook. While BoJ Deputy Governor Shinichi Uchida reiterated on Friday that the central bank would “continue raising interest rates if economic and price developments align with forecasts,” but markets remain skeptical about the pace and extent of any tightening cycle.
Japan’s core inflation has stayed at or above the BoJ’s 2% target for over three years, and GDP has expanded for five consecutive quarters, suggesting the economy is resilient enough to withstand a gradual rate increase. This keeps the door open for another BoJ rate hike, potentially in December or January.
In contrast, the CME FedWatch Tool indicates traders have fully priced in a 25-basis-point rate cut by the Fed in October and another in December, reflecting growing confidence that the US central bank will ease policy as growth slows.
This monetary policy divergence, with the BoJ inching toward normalization while the Fed prepares to cut rates, should, in theory, favor the Yen over the medium term. However, persistent risk aversion, political uncertainty, and fiscal concerns in Japan continue to temper bullish sentiment.
Technical Analysis: USD/JPY Finds Support Near 150.00
From a technical standpoint, the USD/JPY pair has regained traction, lifting spot prices above the 38.2% Fibonacci retracement level of the recent decline from the monthly high. The momentum indicators, including positive oscillators on 1-hour and daily charts, suggest that the pair could extend its upward correction in the short term.
Key resistance levels now emerge near the 151.75 confluence zone, which includes the 61.8% Fibonacci retracement and the 200-hour Simple Moving Average (SMA). A sustained break above this region could pave the way for a retest of the 152.00 handle, followed by further gains toward 152.25 and possibly 153.00.
On the downside, immediate support lies around the 150.50–150.45 region, followed by the 150.25 area, which coincides with the 23.6% Fibo level and the psychological 150.00 mark. A decisive break below 150.00 could expose the 149.40–149.35 support band, with further weakness likely to extend toward 149.00 and 148.40–148.45, where strong horizontal support awaits.
Outlook: Cautious Optimism Amid Conflicting Forces
In conclusion, while the Japanese Yen has managed to recover early losses amid a weaker US Dollar and renewed safe-haven demand, its broader upside potential appears limited. The interplay between domestic political shifts, fiscal risks, and divergent central bank policies continues to create a delicate equilibrium for the USD/JPY pair.
With BoJ policymakers maintaining a cautious tightening bias and the Fed leaning toward rate cuts, the medium-term bias may gradually tilt in favor of the JPY. However, near-term volatility will likely persist as traders weigh fiscal stimulus prospects, geopolitical tensions, and technical resistance levels.
For now, the 150.00 handle remains the key psychological pivot for bullish traders, while sustained buying interest above 151.75–152.00 could open the door to a deeper recovery phase in the USD/JPY pair.
