US-Japan bulls take back the battle! Political infighting and paralyzed central banks have put the yen's defenses on the verge of collapse!
2025-10-16 16:33:43
The USD/JPY pair continued its intraday gains during the European trading session on Thursday (October 16), recovering from a more than one-week low of 150.51 reached early Thursday morning and currently trading around 151.13. Market speculation that the Bank of Japan may delay further interest rate hikes amidst domestic political uncertainty, coupled with generally positive risk sentiment, has become a key factor weakening the safe-haven yen. Furthermore, a slight rebound in the US dollar contributed to the USD/JPY rally.
Cracks in the ruling Liberal Democratic Party (LDP)-Komeito coalition have jeopardized Sanae Takaichi's chances of becoming Japan's prime minister and eased market concerns about Japan's fiscal health. This development has sustained market expectations of an imminent Bank of Japan interest rate hike this year, and combined with renewed trade tensions and geopolitical risks, this may help limit the yen's decline. Meanwhile, the dollar may struggle to attract buyers as markets bet on further rate cuts from the Federal Reserve.
The long-standing ruling coalition between the Liberal Democratic Party and the Komeito Party abruptly collapsed last week. This split means that newly elected LDP President Sanae Takaichi will need to secure support from other parties to become Japan's prime minister. A supporter of Shinzo Abe's economic policies, Takaichi advocates for supporting the economy through large-scale fiscal spending and monetary stimulus. However, this political development has eased market concerns about Japan's fiscal health, providing support for the yen.
Meanwhile, Japan's parliament has failed to set a date for the election of a new prime minister as opposition parties are actively negotiating to gain the support needed to form a government. This uncertainty poses a challenge to the Bank of Japan's further interest rate hikes.
Trade tensions have continued to escalate recently, with US President Trump bluntly stating that the country has fallen into a "full-scale trade war."
Geopolitically, US Secretary of War Pete Hegseth warned Russia to halt military action or face a response that only the US could deliver. This heightened the risk of escalation in the Russia-Ukraine conflict and reinforced the yen's safe-haven appeal amid expectations of a Bank of Japan rate hike.
Bank of Japan board member Naoki Tamura said on Thursday that Japan's economic growth rate is expected to increase and that the slowdown in overseas economies will not be as severe as initially expected. He stressed that the central bank should push interest rates closer to a neutral level. This stands in stark contrast to the market's firm expectations that the Federal Reserve will cut interest rates by 25 basis points in October and December. Coupled with concerns about the economic drag from the US government shutdown, the US dollar continues to come under pressure.
It is worth noting that a federal judge on Wednesday temporarily prohibited the Trump administration from laying off federal workers during the shutdown, while the Senate failed for the ninth time to advance the Republican funding bill passed by the House of Representatives. The market is closely watching the speeches of several heavyweight FOMC officials later in the day for more clues on interest rate cuts, which will directly affect the US dollar and provide new direction for USD/JPY.
Overnight declines pushed USD/JPY below its 200-hour simple moving average (151.77), followed by a break below 150.70 (the 38.2% Fibonacci retracement level of the strong rebound from the October swing low), which was seen as a key signal triggering a bearish rally.
However, oscillators on the daily chart are in negative territory, signaling a short-term bearish bias.
On the downside, the exchange rate may find support near the psychological level of 150.00, which coincides with the 50% Fibonacci retracement level. If it effectively falls below, it may fall to the 61.8% Fibonacci retracement level around 149.15.
On the upside, the pair may be capped near the strong resistance level of 151.65, which contains the breakout point of the 200-hour moving average and the 23.6% Fibonacci retracement level. If there is sustained buying, it will reverse the short-term bearish outlook and push the pair back towards the 152.00 round number and then towards the weekly high around 152.60.
(USD/JPY hourly chart, source: Yihuitong)
At 16:16 Beijing time, the US dollar was trading at 151.12/13 against the Japanese yen.
Cracks in the ruling Liberal Democratic Party (LDP)-Komeito coalition have jeopardized Sanae Takaichi's chances of becoming Japan's prime minister and eased market concerns about Japan's fiscal health. This development has sustained market expectations of an imminent Bank of Japan interest rate hike this year, and combined with renewed trade tensions and geopolitical risks, this may help limit the yen's decline. Meanwhile, the dollar may struggle to attract buyers as markets bet on further rate cuts from the Federal Reserve.
Political turmoil exacerbates Bank of Japan policy uncertainty
The long-standing ruling coalition between the Liberal Democratic Party and the Komeito Party abruptly collapsed last week. This split means that newly elected LDP President Sanae Takaichi will need to secure support from other parties to become Japan's prime minister. A supporter of Shinzo Abe's economic policies, Takaichi advocates for supporting the economy through large-scale fiscal spending and monetary stimulus. However, this political development has eased market concerns about Japan's fiscal health, providing support for the yen.
Meanwhile, Japan's parliament has failed to set a date for the election of a new prime minister as opposition parties are actively negotiating to gain the support needed to form a government. This uncertainty poses a challenge to the Bank of Japan's further interest rate hikes.
Trade tensions have continued to escalate recently, with US President Trump bluntly stating that the country has fallen into a "full-scale trade war."
Geopolitically, US Secretary of War Pete Hegseth warned Russia to halt military action or face a response that only the US could deliver. This heightened the risk of escalation in the Russia-Ukraine conflict and reinforced the yen's safe-haven appeal amid expectations of a Bank of Japan rate hike.
Bank of Japan board member Naoki Tamura said on Thursday that Japan's economic growth rate is expected to increase and that the slowdown in overseas economies will not be as severe as initially expected. He stressed that the central bank should push interest rates closer to a neutral level. This stands in stark contrast to the market's firm expectations that the Federal Reserve will cut interest rates by 25 basis points in October and December. Coupled with concerns about the economic drag from the US government shutdown, the US dollar continues to come under pressure.
It is worth noting that a federal judge on Wednesday temporarily prohibited the Trump administration from laying off federal workers during the shutdown, while the Senate failed for the ninth time to advance the Republican funding bill passed by the House of Representatives. The market is closely watching the speeches of several heavyweight FOMC officials later in the day for more clues on interest rate cuts, which will directly affect the US dollar and provide new direction for USD/JPY.
USD/JPY may struggle to return above the strong resistance level of 151.65
Overnight declines pushed USD/JPY below its 200-hour simple moving average (151.77), followed by a break below 150.70 (the 38.2% Fibonacci retracement level of the strong rebound from the October swing low), which was seen as a key signal triggering a bearish rally.
However, oscillators on the daily chart are in negative territory, signaling a short-term bearish bias.
On the downside, the exchange rate may find support near the psychological level of 150.00, which coincides with the 50% Fibonacci retracement level. If it effectively falls below, it may fall to the 61.8% Fibonacci retracement level around 149.15.
On the upside, the pair may be capped near the strong resistance level of 151.65, which contains the breakout point of the 200-hour moving average and the 23.6% Fibonacci retracement level. If there is sustained buying, it will reverse the short-term bearish outlook and push the pair back towards the 152.00 round number and then towards the weekly high around 152.60.
(USD/JPY hourly chart, source: Yihuitong)
At 16:16 Beijing time, the US dollar was trading at 151.12/13 against the Japanese yen.
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