USD/JPY retreats as Japan election outcome and weak US Dollar weigh

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The Japanese Yen (JPY) attracts fresh buying against the US Dollar (USD) on Monday, with USD/JPY snapping a six-day winning streak as broad-based selling pressure weighs on the Greenback and the Yen remains firmly bid across the board following Japan’s election outcome.

The Yen strengthens broadly after Japan’s ruling party secures a strong election victory.
Expansionary fiscal plans keep inflation and Bank of Japan policy expectations in focus.
The US Dollar stays under pressure ahead of this week’s delayed US jobs and inflation data.

Japan’s Prime Minister Sanae Takaichi’s ruling Liberal Democratic Party (LDP) won 316 of the 465 seats in the lower house, giving the government a “supermajority” and the ability to override the upper chamber.

The strong result clears the path for an expansionary fiscal agenda, including plans to suspend the 8% consumption tax on food for two years and roll out targeted tax cuts and spending to support households and consumption.

Takaichi tried to calm markets by saying the government would not issue new debt to fund the food tax cut, but investors remain cautious about how the measures will ultimately be financed.

The government’s more expansionary fiscal plans could add to inflation pressure in the coming quarters. This has increased market speculation that the Bank of Japan (BoJ) may face growing pressure to raise interest rates sooner than previously expected.

Meanwhile, excessive weakness in the Yen continues to keep Japanese authorities on alert, fuelling speculation over possible currency intervention.

Japan’s Chief Cabinet Secretary Kihara said on Monday that recent moves in the Yen have been “somewhat rapid and one-sided,” adding that the government is concerned about unilateral and excessive fluctuations in the foreign exchange market and is monitoring currency developments with a high sense of urgency.

In the United States, President Donald Trump’s aggressive trade policies and repeated attacks on the Federal Reserve’s (Fed) independence remain a drag on the US Dollar, as investors continue to trim exposure amid growing concerns over policy credibility.

Adding to the Dollar’s woes, markets continue to price in around two interest rate cuts by the Fed this year. Traders are now waiting for the delayed Nonfarm Payrolls (NFP) and Consumer Price Index (CPI) releases due this week for guidance on the timing and pace of easing.

White House Senior Adviser Kevin Hassett said earlier on Monday that “we should expect slightly lower jobs numbers,” adding that “lower jobs numbers shouldn’t trigger panic.”

Looking ahead, Fed Governor Christopher Waller, Stephen Miran and Atlanta Fed President Raphael Bostic are expected to speak later in the day, while attention will also turn to the Retail Sales report due on Tuesday.

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.