USD/JPY climbs above 159.00 amid Japan's fiscal, political concerns

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USD/JPY rises to the highest since July 2024 around 159.15 in Wednesday’s early Asian session, up 0.61% on the day.
Japan's fiscal spending concerns and political uncertainty undermine the Japanese Yen.
Fed has more room to cut rates after inflation data.

The USD/JPY pair jumps to near 159.15, the highest since July 2024, during the early Asian session on Wednesday. The Japanese Yen (JPY) weakens against the US Dollar (USD) amid concerns about looser fiscal and monetary policy in Japan. Traders will keep an eye on the US Retail Sales and Producer Price Index (PPI) reports, which will be published later on Wednesday.

Political uncertainty in Japan could weigh on the JPY and create a tailwind for the pair in the near term. Japanese Prime Minister Sanae Takaichi may call an early general election in February, Reuters reported on Sunday.

“The implications for the yen are quite negative because Takaichi is a dove on both the fiscal and monetary fronts, so fiscally she would be very comfortable with a looser, higher deficit policy,” said Eric Theoret, currency strategist at Scotiabank in Toronto

On the other hand, the prospect of further US interest rate cut this year could drag the Greenback lower. The Consumer Price Index (CPI) inflation readings were seen as potentially giving the Federal Reserve (Fed) more room to cut rates as policymakers balance concerns about still sticky price pressures against a weakening labor market.

After Fed Chair Jerome Powell and other policymakers deployed three rate cuts since September, Fed funds futures traders' pricing showed that a cut is not seen as likely until June.

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.

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