USD/JPY nears 148.00 with the Yen weighed by political uncertainty

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The US Dollar is regaining lost ground against a broadly weaker Japanese Yen on Friday. Market concerns about the political uncertainty in Japan are weighing on the JPY, pushing the pair to 187.90.

The US pares losses against a weaker Yen and approaches the 148.00 mark.
Political uncertainty is weighing on the JPY after PM Ishiba resigned earlier this week.
The US and Japan released a joint statement confirming that FX exchange should be determined by the market.

The US Dollar is regaining lost ground against a broadly weaker Japanese Yen on Friday. Market concerns about the political uncertainty in Japan are weighing on the JPY, pushing the pair to 187.90. From a longer perspective, however, the pair has kept trading sideways roughly between 146.00 and 149.00 since early August.

Investors seem to have digested the weak US Jobless Claims released on Thursday, which is providing some support to the US Dollar. The USD Index, which measures the US Dollar against a basket of currencies, is 0.2% up on the day, following a sharp reversal on Thursday.

PM Ishiba's resignation cast doubt on BoJ tightening plans

The resignation of Japanese Prime Minister Shigeru Ishiba, led the country into a political impasse, with some of the candidates to replace him showing opposing views to the Bank of Japan’s monetary tightening plans, which have increased bearish pressure on the yen.

Earlier in the day, the Japanese Finance Minister, Katsunobu Kato, and US Treasury Secretary, Scott Bessent, issued a joint statement confirming that foreign exchange should be determined by the markets and that extreme volatility is undesirable.

Later today, the US Michigan Consumer Confidence Index is expected to show further evidence that the trade uncertainty is weighing on consumers’ purchasing decisions. This might cap the current US Dollar’s recovery.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.