USDJPY has been surging since the start of October, with no signs of slowing down. The fundamentals behind this move are twofold.
On the U.S. side, the dollar is strengthening due to a stronger-than-expected jobs market and stickier-than-expected inflation. Additionally, Trump’s planned tariffs have further amplified the dollar’s upward momentum.
On the Japan side, the situation is more complex. The new election and the minority government of Ishiba have heightened political risks. This instability is expected to influence the Bank of Japan’s (BoJ) decision-making, as many members are reluctant to raise rates in an uncertain market.
Meanwhile, BoJ’s inaction expectations are rising, and Ishiba’s proposed plans for increased fiscal spending are causing additional concerns. His plan includes $65 billion for AI and chip investments and $192 handouts to low-income households, excluding additional planned handouts for every child.
These fiscal measures are particularly worrying given Japan’s debt-to-GDP ratio of 255%, the highest among developed countries.
(US-Japan 2 Year Bond Yield Spread)
Despite the increase in Japanese government bond yields, the U.S.-Japan yield spread is widening rapidly. Since the start of October, the spread has increased by 50 basis points, fueling the rise of USDJPY.
While the currency has been rising faster than the spread, the upward momentum may continue. In the last two bullish Yen runs, the U.S.-Japan yield spread began narrowing first, and USDJPY followed suit only after at least a couple of weeks.
For now, there’s no indication of a slowdown. Any decline in USDJPY is likely to present a buying opportunity, barring a significant shift in the underlying fundamentals.
(USDJPY Daily Chart)
Among the many factors Yen traders must monitor, one stands out as the most crucial in the short term: potential FX interventions. Sharp rises in USDJPY often continue until multiple FX interventions are initiated. While there may still be some room for further upside, the risk of intervention is approaching quickly.
Without intervention, 156.67 serves as the final key resistance before 160. We do not anticipate any intervention from Japan until USDJPY reaches 160, and even then, action might only occur if the pair approaches 165.
On the downside, 151.50 is the primary support level to watch for short- to medium-term moves.
