USD/JPY holds positive ground above 158.00 amid Japan's political concerns

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The USD/JPY pair trades in positive territory near 158.10 during the early Asian session on Tuesday. The Japanese Yen (JPY) softens against the US Dollar (USD) amid political concerns in Japan.

USD/JPY strengthens to around 158.10 in Tuesday’s early Asian session.
Reports that Japan's Prime Minister may call an early general election weigh on the Japanese Yen.
Fed’s Powell accused the government of using the legal system against the US central bank.

The USD/JPY pair trades in positive territory near 158.10 during the early Asian session on Tuesday. The Japanese Yen (JPY) softens against the US Dollar (USD) amid political concerns in Japan. Traders will closely monitor the release of the US Consumer Price Index (CPI) inflation data for December, which is due later on Tuesday.

Reuters reported on Sunday that Japan’s Prime Minister Sanae Takaichi may call an early general election, and it could be held as early as February. This would be the first time for the conservative Takaichi to face the voters, giving her an opportunity to capitalize on the strong public approval ratings she has enjoyed since taking office in October. Concerns about political uncertainty in Japan might undermine the JPY and create a tailwind for the pair in the near term.

On the other hand, renewed questions about the Federal Reserve (Fed) independence could drag the Greenback lower. Fed Chair Jerome Powell said that the administration had threatened him with a criminal indictment related to the central bank headquarters renovation. Powell called the threats a "pretext" aimed at putting pressure on the Fed to cut interest rates. Fitch Ratings said on Monday it views the US central bank's independence as a key supporting factor for its AA+ ‌U.S. sovereign rating.

"This open warfare between the Fed and the U.S. administration ... it's clearly not a good look for the U.S. dollar," said Ray Attrill, National Australia Bank's head of currency strategy.

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.