USD/JPY strengthened to around 153.05 in the early Asian session on Friday. This increase was fueled by a stronger US dollar as worries over the ongoing US government shutdown continued. The Japanese Yen (JPY) remains under pressure, especially following Sanae Takaichi’s election as the leader of Japan’s ruling party. Traders are concerned about rising fiscal spending in Japan and lower chances of an interest rate hike by the Bank of Japan.

Market Reaction to New Leadership

Takaichi stated she does not plan to intentionally weaken the Yen too much, recognizing that a weak Yen has both benefits and drawbacks. In the US, the Senate is stuck on a bill to end the government shutdown. Market participants are watching closely, as the shutdown could negatively affect the US economy, adding downward pressure on the USD. Later on Friday, attention will shift to the U-Mich Consumer Sentiment report and speeches from Federal Reserve officials. Any dovish comments could influence the USD’s performance against the JPY in the near term. The Japanese Yen is affected by the state of the Japanese economy, Bank of Japan policies, differences in bond yields, and overall global risk sentiment. Its status as a safe haven attracts traders during times of market volatility, increasing its value against riskier currencies.

Potential Intervention Risks

The USD/JPY is trading strongly above the 153.00 mark, a key level to watch. This rise is driven by a robust US dollar, even as the government shutdown continues into its tenth day. The uncertainty from Japan’s new leadership is also weighing on the yen. Currently, the interest rate differential is the main factor supporting this trend. The US 10-year Treasury yield is stable around 4.6%, while Japan’s 10-year bond yield is just 1.1%. This large gap makes holding US dollars much more attractive than holding Japanese yen, promoting the carry trade. However, trading above 153.00 raises the risk of intervention from Japanese authorities. We observed similar market interventions in 2022 and 2024 when the yen weakened past these levels. Recent warnings from officials suggest they are ready to intervene again if necessary. This heightened risk of a sudden reversal means implied volatility for USD/JPY options is likely to rise. Traders should think about buying short-dated yen call options or USD/JPY put options as a hedge against potential intervention. This strategy offers protection against sudden drops while minimizing upfront costs. We shouldn’t completely overlook the US government shutdown, even though the market seems to be doing so. Looking back at the 35-day shutdown from 2018-2019, prolonged closures hurt economic growth and consumer confidence, ultimately weakening the dollar. If this situation drags on, sentiment against the USD could shift quickly. The upcoming University of Michigan Consumer Sentiment report and comments from Fed officials will be crucial. After the September CPI report showed inflation remaining at 3.8%, any indication from the Fed that they’re concerned about the economic effects of the shutdown could be seen as dovish. This might bring the dollar down without any action needed from Japan. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now