• The Japanese Yen depreciates as the latest Tokyo inflation data reduces expectations of a near-term rate hike in Japan.
• Fiscal concerns and political uncertainty weigh on the Japanese currency, despite lingering fears of official intervention.
• The US Dollar firms modestly, supporting USD/JPY, although doubts surrounding the Federal Reserve cap upside potential.

USD/JPY trades higher at the start of the week and hovers around 155.60 on Monday at the time of writing, up 0.55% on the day. The move reflects renewed weakness in the Japanese Yen (JPY), driven by reduced expectations of monetary tightening by the Bank of Japan (BoJ), combined with a moderate rebound in the US Dollar (USD).

The Japanese Yen remains under pressure following the release of weaker-than-expected inflation indicators in Tokyo. The Consumer Price Index (CPI) slowed sharply, pointing to easing underlying inflationary pressures and reducing the urgency for the Bank of Japan to raise interest rates in the near term. These figures reinforce the view that the central bank will remain cautious after its recent policy normalization, with markets now pushing the probability of another rate hike toward the spring.

Political factors are also adding to the fragility of the Japanese Yen. Expansionary economic proposals from Japanese Prime Minister Sanae Takaichi, along with uncertainty surrounding the snap election scheduled for Sunday, have revived concerns over fiscal sustainability. Investors fear that stronger parliamentary backing could encourage further tax cuts and additional stimulus measures, weighing on Japan’s fiscal credibility.

In this environment, the downside in the Japanese Yen is partially limited by fears of official intervention. Rumors of unusual rate checks and repeated warnings from the Ministry of Finance continue to instill caution among JPY sellers, helping to restrain the pace of depreciation for now.

In addition, global geopolitical and trade risks continue to underpin latent demand for safe-haven assets, which could eventually lend some support to the Japanese Yen.

On the US side, the US Dollar receives modest support. Recent macroeconomic data, particularly the strong rebound in the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) released earlier in the day, reinforce the perception of a resilient US economy. This allows the Greenback to stabilize after a period of weakness, offering additional support to the USD/JPY pair.