The Japanese Yen hits a nine-month low, with Japan's weak economy and uncertainty over the central bank's policies being the main drag.

The Bank of Japan’s Rate Hike Outlook Is Dull, Yen Buyers’ Confidence Is Severely Lacking

Last week during Asian trading hours, the yen again weakened against the US dollar, approaching a nine-month low. Multiple factors contributed to this decline: Japanese economic data fell short of expectations, expectations for a rate hike by the central bank were significantly revised downward, and the dollar was supported by weakening expectations of Fed rate cuts. The USD/JPY currency pair fluctuated above 154.00, with market participants stuck in a stalemate.

Economic Contraction Hits Rate Hike Expectations, BOJ Faces Dilemma

Data released by Japan’s Cabinet Office on Monday showed that GDP contracted by 0.4% quarter-on-quarter in the third quarter, marking the first negative growth in six quarters. Year-over-year, growth shifted from 2.3% in the previous quarter to a negative 1.8%. Although the decline did not meet the most pessimistic market expectations, the signals of weakness are clear enough.

This set of data directly weakened market expectations for the BOJ’s recent rate hike. Meanwhile, Prime Minister Sanae Suga’s government is preparing a new round of fiscal stimulus to ease the cost of living for the public. This stance further reinforced the market’s view that monetary policy will remain accommodative, continuing to suppress the yen’s appreciation potential.

Political Tensions Stir the Market, Japanese Authorities Forced to Intervene

It is worth noting that recent tensions between China and Japan are quietly influencing the forex market. Sanae Suga’s comments on Taiwan defense drew a stern response from China. Such geopolitical risks temporarily boosted safe-haven demand, providing some support to the yen. However, this effect was limited.

Japan’s Finance Minister and Economy Minister expressed concern about the exchange rate trend, hinting that authorities might verbally intervene if the yen depreciates excessively. Although these warnings did not fully stop the yen’s bearish attack, they did somewhat restrain the decline. The risk of yen depreciation raising import costs and pushing up prices has also made policymakers more attentive to forex market movements.

Fed Policy Shift Supports the Dollar

On the other hand, recent subtle changes in the Fed’s policy stance are also supporting the dollar. As more Fed officials signal caution without new data to justify a change, market bets on a rate cut in December have sharply diminished. This directly enhances the dollar’s attractiveness and supports the upward momentum of the USD/JPY pair.

Upcoming releases of US non-farm payrolls, FOMC minutes, and speeches by Fed officials on Thursday will be key focus points. These data and comments are expected to set the tone for the dollar’s direction.

Technical Outlook: Bulls Gearing Up, 155.00 Key Breakout Level

From a technical perspective, USD/JPY rebounded from the support level at 153.60 (corresponding to the 100-period simple moving average on the 4-hour chart) last Friday and closed above the resistance at 154.45-154.50, showing a clear bullish momentum. The daily oscillators remain in positive territory and are far from overbought, leaving room for further gains.

Once the exchange rate stabilizes above the psychological level of 155.00, bullish expectations will be further reinforced, with the next target at the intermediate resistance of 155.60-155.65, and then testing the 156.00 round figure.

Conversely, if it falls below the recent support at 154.00, it may find support around 153.60-153.50. However, a confirmed break below the 153.00 round figure would be a key technical turning point, potentially shifting the short-term bias from bullish to bearish and pushing the rate further down to the 152.15-152.10 zone.

Investors Should Exercise Caution Amid Current Exchange Rate Volatility. The combination of weak Japanese economic data, uncertainty over BOJ policy, and the Fed’s subtle stance adjustments creates a triangular game that will determine the USD/JPY’s future performance. Traders should closely monitor next week’s economic data and officials’ statements to identify potential turning points in the exchange rate.