The Japanese Yen (JPY) is recovering slightly after comments from Japan’s Finance Minister Kato and possible interest rate hikes from the Bank of Japan (BoJ). A small drop in the US Dollar (USD) has pushed the USD/JPY pair away from its highest level since mid-February. Concerns about Japan’s fiscal health are rising after Sanae Takaichi unexpectedly won the Liberal Democratic Party’s leadership race, creating uncertainty around BoJ’s policies. Japan’s inflation is still above 2%, and the economy has grown for the fifth quarter in a row. Advisors to Takaichi predict a possible rate hike by January, aiming to stabilize the currency and prevent a steep decline of the yen. Finance Minister Katsunobu Kato stresses the need to monitor fluctuations in the foreign exchange market. Asian equity markets are cautious, which supports a slight recovery of the JPY against a weakening USD during the Asian session on Friday.

US Government Shutdown and Its Impact

The US government shutdown continues with slow progress on funding bills. The upcoming release of the University of Michigan Consumer Sentiment Index and comments from FOMC members could influence the USD. Despite the tensions, the USD/JPY pair is set for a strong weekly close, though technical indicators warn of overbought conditions. Still, further gains are likely, especially above key resistance levels. Japan’s Finance Minister has issued verbal warnings, indicating that officials are concerned about the yen’s weakness at levels above 152.00. However, the market is more focused on the new Prime Minister, Sanae Takaichi, whose anticipated spending policies may lead the BoJ to delay any further interest rate hikes. This conflict between government policy and central bank actions is causing significant tension. Currently, the most likely trend is a weaker yen, pushing the USD/JPY pair higher. Any dips towards the 152.55 area may present buying opportunities, especially after breaking above the key 151.00 level. The appointment of pro-stimulus advisors, like Etsuro Honda, suggests that the new administration will focus on growth over immediate currency strength. However, the risk of direct intervention by the Ministry of Finance is now very high. We remember the direct market intervention in late 2022 when the pair exceeded 151.90. We are in a territory where authorities have acted before. The recent warnings mark the beginning, and traders should not overlook the increased chance of a sudden and sharp rise in JPY.

Outlook on Central Banks and Market Response

Recent data complicates the outlook. Japan’s latest core CPI for September came in at 2.8%, significantly above the BoJ’s target and increasing the pressure for a rate hike. In the US, the weaker-than-expected September Non-Farm Payrolls report of 150,000 jobs has strengthened expectations for a Federal Reserve rate cut in November. This difference in potential actions from the central banks is driving volatility in the pair. In the upcoming weeks, we think using options is the safest way to handle this uncertainty. Buying long-dated USD/JPY call options allows for potential gains towards the 154.00 and 155.00 levels while limiting risk if the government intervenes unexpectedly. The high implied volatility makes selling options risky, but straddles could be effective for those anticipating significant price swings in either direction after the BoJ meeting or any surprise announcements. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now