Stability of the USD/JPY – London Business News | Londonlovesbusiness.com

The relative stability of the USD/JPY pair following Japan’s recent elections, in which the Liberal Democratic Party lost its majority, reveals complex economic and political dimensions and the market’s ability to react quickly to political shifts.

This event has had a tangible impact on the Japanese yen, which fell to around 152.95 in early Tuesday trading, following a retreat in the U.S. dollar from its nearly three-month high.

Although the immediate effect of the election results was felt on the yen, market expectations regarding the Bank of Japan’s (BoJ) potential interest rate moves and the new political divide are likely to play a more significant role in the pair’s future direction.

In my view, this decline comes amid a climate of political uncertainty surrounding the formation of the upcoming government. The ruling coalition, led by the Liberal Democratic Party, lost its majority, raising questions about the continuation of Japan’s stable economic policies in recent years. A hung parliament could complicate the passage of economic policies, creating uncertainty around future economic and monetary plans, including the BoJ’s anticipated plan to raise interest rates. With the markets largely expecting the BoJ to keep rates unchanged at its upcoming meeting, political factors could hinder bold monetary decisions.

On the other hand, U.S. Treasury yields have played a significant role in influencing USD/JPY movements. Expectations that the U.S. Federal Reserve may adopt a less aggressive future monetary policy provide some support for the dollar, with an anticipated 25 basis point rate cut in November, and potentially another cut in December. This outlook could make the dollar relatively more attractive compared to the yen, especially given Japan’s slower approach to monetary normalization. Should U.S. economic data this week, including GDP, inflation, and employment metrics, show weakness, this could weigh on the dollar, providing the yen with a chance to recover.

From a political perspective, Japan’s policy future appears tied to the Liberal Democratic Party’s ability to form new alliances that enable policy passage in parliament. In my opinion, this suggests a period of instability on both political and economic fronts, particularly given the lack of clarity around future economic leadership. If coalition efforts fail to bring about stability, markets could face a wave of selling pressures on the yen. Indeed, the Constitutional Democratic Party of Japan, led by Yoshihiko Noda, was unable to secure the majority needed to form a strong coalition, signalling ongoing uncertainty.

I believe the recent drop in U.S. Treasury yields has directly supported USD/JPY levels, as this yield decline weakened the U.S. dollar relatively, prompting some investors to capitalize on low yen levels. Treasury yields, in my view, will be a key factor in determining the pair’s near-term trajectory, as investors closely watch the Fed’s interest rate expectations and listen attentively to Fed officials on policy tightening. Moreover, the partial recovery in Japan’s labour market, with unemployment falling to 2.4% in September, could lend strength to the yen if this positive data trend continues.

Despite the slight drop in the U.S. dollar, I see medium-term stability for the USD/JPY pair as conditional upon the market’s response to Japan’s political outcomes and U.S. monetary policy developments. The U.S. dollar continues to have a higher appeal, given the Fed’s stable outlook and expectations of a rate cut. This stability may make it challenging for the Japanese yen to recover significantly and sustainably unless substantial changes occur in the BoJ’s monetary policy.

Based on these developments, I believe the U.S. dollar is likely to remain supported against the yen unless Japan takes concrete steps toward raising interest rates or the political outlook becomes oriented toward stability. The USD/JPY’s upward trend may be limited in the short term by selling pressures stemming from political concerns, but as long as U.S. yields remain relatively high compared to Japanese yields, the dollar is likely to retain its momentum.

In conclusion, anticipation and uncertainty are the prevailing sentiments in Japanese financial markets, especially with the BoJ meeting approaching this Thursday, where expectations are high that rates will remain unchanged. With the U.S. dollar continuing to respond to American economic data, it can be said that the direction of the USD/JPY pair will depend on a combination of intertwined factors, including Japan’s political and economic outlook, and the continued support for the dollar from U.S. yields.

Technically, the bullish momentum on the daily chart remains intact, with the Relative Strength Index (RSI) rising again toward overbought conditions. The pair’s movement is tilted to the upside in the near term. Resistance levels are seen at 155 and 156.50, which align with the 76.4% Fibonacci retracement levels.

Support is located at 151.50, aligning with the 200-day Moving Average (DMA), and at 150.60-150.70, representing the 50% Fibonacci retracement level from July’s high to September’s low and the 100 DMA. It’s worth noting that a verbal intervention from the Japanese government to support the yen might occur if the USD/JPY pair quickly trades up to the 155–156 range; however, we doubt there will be an actual intervention for the remainder of the year.

The USD/JPY pair has now advanced to trade above the 100-hour moving average. Consequently, the pair is approaching overbought levels on the 14-hour Relative Strength Index (RSI). In the short term, based on the hourly chart, USD/JPY is trading within a sideways channel formation.

However, the 14-hour RSI has recently bounced back, nearing overbought territory. Therefore, bulls may aim to extend the current rally toward 153.75 or higher to the 154.00 resistance, while bears could look to take profits around 152.46 or lower at 151.55.

On the longer-term daily chart, USD/JPY is trading within an ascending channel formation. The 14-day RSI also appears to support a long-term bullish bias as it approaches overbought levels. As a result, bulls may attempt to push the current uptrend toward 155.03 or higher to the 158.04 resistance. On the other hand, bears might seek further pullbacks around 149.40 or lower at the 145.90 support level.

Support Levels: 152.73 – 152.32 – 151.65

Resistance Levels: 153.54 – 153.94 – 154.61