USD/JPY extends the rally above 152.50 on fiscal fears in Japan

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USD/JPY gains momentum around 152.60 in Thursday’s early Asian session.
The US Dollar has benefited from a lack of government economic data as the federal government remains shut.
Takaichi's election raises fiscal spending concerns.

The USD/JPY pair extends its upside to near 152.60, the highest since February, during the early Asian session on Thursday. The US Dollar (USD) edges higher against the Japanese Yen (JPY) despite US government shutdown concerns. The US weekly Initial Jobless Claims will be postponed again later on Thursday. Traders will closely monitor the speech by Federal Reserve (Fed) Chair Jerome Powell.

The Senate on Wednesday again rejected dueling Republican and Democratic funding proposals to end the government shutdown, which has entered its ninth day with no hint of progress toward a resolution. However, the lack of US government economic data that might point to a slowing economy helps the Greenback gain against the JPY.

“Once the focus shifted to developments outside of the U.S. and then there's no kind of negative drag on the dollar from potentially weaker U.S. data, then the dollar is doing well,” said Vassili Serebriakov, an FX and macro strategist at UBS in New York.

Minutes from the Fed's September meeting released on Wednesday showed that policymakers are leaning toward further rate cuts this year. While most officials backed the quarter-point reduction. The tone overall was cautious but pointed to a continued dovish bias. This, in turn, could weigh on the USD in the near term.

The surprise election of Sanae Takaichi to Japan’s ruling Liberal Democratic Party (LDP) on Saturday raises concerns about an increase in fiscal spending in Japan and prompts traders to reduce bets that the Bank of Japan (BoJ) will hike interest rates this month, which weighs on the JPY.

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.

Money market traders are currently pricing in nearly a 26% chance 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.