USD/JPY off to poor start on Monday as pair loses 35 basis points on US Dollar strength

Japanese Yen continues giving ground against the US Dollar, with USD/JPY coiling up below 150 and threatening to break higher.
Dovish comments from BoJ’s governor Ueda propelled the last push higher for USD/JPY.
Intervention from Japanese authorities possible as key price and yield levels now approaching or touched.

The Japanese Yen (JPY) has continued sinking against the US Dollar (USD) on Monday afternoon (circa 14:30 EST), with the USD/JPY pair selling off from an intraday high in the Asian session of 149.98 to 149.63 at the time of writing. At last check, Yen/US Dollar was down 0.13% from last week's close. This is mostly attributable to US Dollar strength as the US Dollar Index (DXY) sank 0.6% in the US afternoon session.

The pair remains coiled up below the key 150 level, however, threatening to breakout higher if the longer-term uptrend that began in January decides to regroup and extend.

Comments from Bank of Japan (BoJ) governor Katsuo Ueda fueled the recent rise in the pair. When responding to figures showing a fall in inflation last week, Ueda said the bank would be maintaining its current accommodative approach. His dovish words put pressure on the Yen and drove USD/JPY higher.

Japanese Yen news and market movers

The Japanese Yen continues its downtrend after comments from BoJ governor Kazuo Ueda, on Friday, in which he reiterated that the BoJ would be “patiently maintaining current easy policy.”
This came after the release of Japanese inflation data for September revealed a slowdown in price rises.
The National Consumer Price Index fell to 3.0% from 3.2% a year ago. National CPI ex-Fresh Food fell to 2.8% from 3.2% year-on-year (YoY). Whilst still above analysts’ estimates of 2.7%, it was the first time since August 2022 that the index had fallen below 3.0%. National CPI ex Food and Energy fell to 4.2% from 4.3% YoY.
The yield on the 10-year Japanese Government Bond (JGB) has risen to close to the 1.0% YCC threshold. If it touches 1.0%, the BoJ will probably ease policy further to bring it down, pushing the Yen even lower.
Complicating matters further, the USD/JPY briefly rose above the key 150 threshold on Monday. This is the level where the Japanese Ministry of Finance (MoF) has historically intervened in markets to strengthen the Yen so that imports do not become unaffordably expensive.
Due to the market’s view that the MoF usually intervenes to defend 150, it could lead to selling pressure as the idea becomes a “self-fulfilling prophecy,” according to analysts at Commerzbank.
“The market assumption that 150 constitutes the MOF’s line of defense can turn into a self-fulfilling prophecy,” Commerzbank said in its note.
A decisive break above 150, however, could lead to a strong move substantially higher. The breaking of the level on Monday, “constitutes a sign that the exchange rate fundamentally justified from the market’s point of view is much higher than 150,” said Commerzbank.
The Japanese authorities are in Catch-22 as pressure to maintain the YCC threshold is likely to lead to a weaker Yen, whilst at the same time, maintaining the 150 threshold, will require the opposite – a stronger Yen.

Japanese Yen technical analysis: Right-hand triangle in an uptrend

US Dollar dynamics will also influence the pair, including the release of data in the week ahead. The Fed’s preferred measure of inflation (PCE price index) will carry the most significance when it is published on Thursday, October 27, along with Michigan Consumer Confidence. US Durable Goods Orders and GDP, out on Friday, October 28, may also impact the USD.

USD/JPY is in an overall uptrend, rising on long-term, intermediate, and short-term bases.

It is expected to continue this trend higher, with the next major target at the 152.00 highs achieved in October 2022.

The pair is forming a possible ascending triangle on the daily chart and a decisive break above the 150.16 highs of October 3 providing confirmation of a breakout of the triangle – also with a target in or around the 152s.

US Dollar vs Japanese Yen: Daily Chart

In technical terms, a ‘decisive break’ consists of a long green daily candlestick that pierces cleanly above the critical level in question and then closes near to the high of the day. It can also mean three up days in a row that break cleanly above the level, with the final day closing near its high.

Triangles are sometimes the penultimate formations in a trend, suggesting the current uptrend may be nearing its culmination point.

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 has embarked in an ultra-loose monetary policy since 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.

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

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.

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