USD/JPY gathers strength above 151.50 on BoJ rate hike uncertainty

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The USD/JPY pair rises to near 151.85 during the early Asian session on Wednesday. The Japanese Yen (JPY) reached its weakest level since February against the US Dollar (USD) after Sanae Takaichi’s surprise win as the new leader of Japan’s ruling Liberal Democratic Party (LDP).

USD/JPY strengthens to around 151.85 in Wednesday’s early Asian session.
Concerns about the fiscal outlook in Japan weigh on the Japanese Yen.
US government shutdown entered its eighth day as senators failed to pass spending proposals to reopen the federal government.

Japan's ruling party has elected Takaichi as its new leader, positioning the 64-year-old to be Japan's first female Prime Minister. Takaichi indicated she wants the Bank of Japan (BOJ) to proceed cautiously on a rate hike and favors close communication between the central bank and the government.

Her victory caused traders to reduce bets that the BoJ will raise interest rates this month, undermining the JPY and creating a tailwind for the pair. Money market traders are currently pricing in nearly a 26% odds that the BoJ will raise interest rates at its next policy meeting on October 30, down from around 60% before Takaichi's leadership victory, according to Bloomberg.

On the other hand, the ongoing US government shutdown might drag the Greenback lower against the JPY. The Senate on Monday did not pass a House bill for a fifth time that would temporarily fund the US government, deepening the government funding stalemate. US President Donald Trump said that his administration would begin laying off federal workers if the shutdown persists beyond Monday.

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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