USD/JPY gains traction above 147.00 as US Dollar rebounds

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USD/JPY rebounds to around 147.20 in Friday’s early Asian session.
Traders weighed the impact of a US government shutdown.
The Liberal Democratic Party leadership election on Saturday will be closely watched.

The USD/JPY pair recovers some lost ground near 147.20, snapping the four-day losing streak during the early Asian session on Friday. The potential upside for the pair might be limited as traders continue to assess the impact of a US government shutdown. The US September Nonfarm Payrolls (NFP) report will not be published in light of the ongoing federal shutdown, while the ISM Services PMI and the final S&P Global Services PMI should be published as usual.

US government agencies began shutting down after President Donald Trump's Republican Party failed to agree with opposition Democrats on a way forward on a spending bill. This, in turn, drags the USD lower against the JPY. Additionally, the downbeat US economic data undermines the Greenback as the ADP National Employment report showed private payrolls declined by 32,000 in September, boosting expectations that the Federal Reserve (Fed) will cut interest rates two more times this year.

Markets expect a 25 basis points (bps) cut at the Fed’s October meeting and are currently pricing in a 90% chance of an additional reduction in December, according to the CME FedWatch Tool.

On the other hand, political uncertainty in Japan could weigh on the Japanese Yen (JPY) and create a tailwind for the pair. The ruling Liberal Democratic Party (LDP) prepares to elect its new leader this weekend. The new Prime Minister will influence the trajectory of Japan's fiscal policy, which could further determine the Bank of Japan's (BoJ) policy stance and drive the JPY in the near term.

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.