The Japanese Yen performed well in Asian trading on Thursday, pushing USD/JPY back slightly to around 152.60.

Japanese Finance Minister Katsunobu Kato warned this week that the yen has fluctuated too much recently, emphasizing that the currency should be stable to reflect fundamentals. At the same time, market expectations that Japan may raise interest rates also provide some support for the yen.

However, further yen strength faces limits. Newly elected Prime Minister Sanae Takaichi, the first female prime minister, is likely to push for expansionary fiscal policy and is expected to oppose further central bank tightening.

Investor uncertainty about Japan's fiscal policy has limited confidence in yen bulls. Furthermore, the agreement between Israel and Hamas on the first phase of their peace plan, easing global geopolitical tensions, has also curbed the yen's appreciation as a safe-haven asset.

With inflation remaining above the Bank of Japan's 2% target and the economy growing for five consecutive quarters, market expectations remain high for another interest rate hike this year. However, with the prime minister's appointment and policy changes, the probability of a rate hike at the next Bank of Japan meeting on October 30 has dropped from around 60% last Friday to 26%.

Regarding the US dollar, the minutes of the Federal Reserve's September meeting showed that most officials were inclined to cut interest rates due to increased labor market risks, but there was disagreement on the number of rate cuts. The CME FedWatch tool showed that the market still had a high probability of a 25 basis point rate cut in October and December.

The USD/JPY daily relative strength index is approaching overbought territory, limiting new long positions in the short term. In the event of a pullback, the 152.00 round number and the previous night's low of 151.70 could attract bargain hunting, keeping the price below the strong support of 151.00.

The upper resistance level is 153.00 and Wednesday’s multi-month high. If the price continues to break through, it can further explore the 153.70-153.75 area, and the ultimate target is 154.00, which is the first challenge since February 12.

Overall, USD/JPY is still in a short-term bull-bear game pattern. Pullbacks provide low-level buying opportunities, while breaking through key resistance confirms the continuation of the bull market.

Editor's opinion:

The yen is supported in the short term by a weaker dollar and policy uncertainty in Japan, but expectations of fiscal expansion and declining safe-haven demand may curb further appreciation. Focus on Bank of Japan policy, dollar trends, and global geopolitical developments to identify key breakout areas for the USD/JPY pair. A break above key resistance levels would confirm the continuation of the bullish trend.