The Japanese Yen (JPY) started the new week on a weaker note, reflecting heightened domestic political turmoil and lingering market uncertainty. Over the weekend, Japanese Prime Minister Shigeru Ishiba announced his resignation, prompting the Liberal Democratic Party (LDP) to organise an emergency leadership race.
This unexpected political development overshadowed optimism generated by the recently signed US-Japan trade deal and the upward revision of Japan’s Q2 GDP growth, adding downward pressure on the JPY and keeping USD/JPY trading biased to the downside. This article from BluSkyMint’s broker Sebastian Alonso offers a deep dive into the subject.
Despite a slight recovery from the Asian session low, the Japanese Yen remains under pressure. A positive risk sentiment in global markets has also contributed to the soft tone in the JPY, as traders rotate into riskier assets.
Meanwhile, stronger-than-expected private spending data released last Friday has kept hopes alive for a potential Bank of Japan (BoJ) interest rate hike later this year, highlighting a notable divergence from the Federal Reserve’s (Fed) easing expectations.
BoJ-Fed Policy Divergence Offsets Political Uncertainty
The resignation of PM Ishiba adds a layer of political uncertainty, which could temporarily slow the BoJ’s policy normalization efforts. Traders are closely monitoring how the BoJ responds to both domestic political risks and economic fundamentals.
On the data front, Japan’s Cabinet Office reported that the economy expanded at an annualized 2.2% rate in Q2, significantly faster than the initial 1.0% estimate. Quarterly, GDP rose 0.5%, surpassing median expectations of 0.3% growth.
The data was supported by real wage gains, which turned positive for the first time in seven months, and a rise in household spending, indicating stronger domestic consumption trends. These developments maintain market speculation for a BoJ rate hike later this year, which may cap aggressive JPY selling despite ongoing political uncertainty.
From the US perspective, the Nonfarm Payrolls (NFP) report for August revealed a disappointing 22,000 job gain, well below expectations. Revisions to prior months also highlighted labor market softness, with June experiencing a 13,000 job decline.
Other metrics showed the Unemployment Rate slightly increased to 4.3%, while Labor Force Participation edged up to 62.3%. Annual wage inflation, measured via Average Hourly Earnings, slowed to 3.7% YoY from 3.9% previously.
This combination of soft US labor market data has reinforced rate cut expectations for the Fed, with traders now pricing in the potential for multiple interest rate reductions before year-end.
The data has caused a slump in US Treasury yields and placed downward pressure on the USD, which in turn limits potential gains for USD/JPY. The market’s attention now shifts to US inflation metrics, with the Producer Price Index (PPI) and Consumer Price Index (CPI) scheduled for release midweek, which could provide further guidance for monetary policy expectations.
Technical Outlook: USD/JPY Faces Key Resistance Levels
From a technical analysis perspective, the USD/JPY pair is encountering resistance near the 200-day Simple Moving Average (SMA) at approximately 148.75. This level coincides with the 149.00 round figure and the 149.20 one-month high, which represents the 61.8% Fibonacci retracement of the August decline.
A decisive break above these levels could trigger bullish momentum, potentially targeting the 150.00 psychological level and the August monthly swing high near 151.00.
On the downside, failure to hold 148.00 could attract dip buyers around the 147.45-147.40 zone, limiting further losses. A more pronounced break below 146.80-146.70 horizontal support would tilt the near-term bias toward bearish traders, with a potential move toward the August swing low at 146.20 and further toward 146.00.
Market Implications
The Japanese Yen remains a safe-haven currency, but its performance is currently overshadowed by political instability and divergent central bank policies. While the BoJ is expected to gradually normalize its ultra-loose monetary policy, the Fed’s rate cut expectations are putting a ceiling on the USD/JPY upside.
Traders are therefore advised to remain cautious and monitor domestic political developments, economic data, and technical resistance levels before taking fresh positions.
Conclusion
JPY bears face a complex environment where BoJ rate hike expectations may offset political uncertainty, while USD/JPY technical levels provide critical guidance for both bullish and bearish strategies. Until the political situation clarifies and monetary policy signals from both Japan and the US become clearer, the JPY is likely to maintain its negative bias, with any rallies being limited and temporary.
