Japanese Yen hangs near eight month low against USD amid fiscal concerns and BoJ outlook

USD/JPY

FXStreetOct 10, 2025 2:24 AM

The Japanese Yen continues to be undermined by concerns about the fiscal outlook in Japan.
The USD consolidates its strong weekly gains and further offers support to the USD/JPY pair.
Bets for another BoJ rate hike this year offer some support to the JPY and help limit further losses.

The Japanese Yen (JPY) recovers slightly after touching a fresh low since February 13 against a broadly firmer US Dollar (USD) during the Asian session on Friday, though the upside potential seems limited. Market participants have been speculating that Sanae Takaichi will introduce more fiscally expansive policies following an unexpected result from the ruling Liberal Democratic Party's (LDP) leadership election last Saturday. This could further delay the Bank of Japan's (BoJ) tightening plan, which, in turn, has been a key factor behind the JPY's slump since the beginning of this week.

However, bets for another interest rate hike by the BoJ this year remain on the table amid sticky inflation and economic resilience. This, along with a softer tone around the equity markets, is seen offering some support to the safe-haven JPY. The USD, on the other hand, consolidates its strong weekly gains to the highest level since early August and contributes to capping the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the JPY has bottomed out in the near term and placing bullish bets.

Bears retain control as Takaichi's policies could delay BoJ rate hikes

Concerns over Japan’s fiscal health grew, and expectations for an immediate interest rate hike by the Bank of Japan dimmed after Sanae Takaichi's surprise win in the ruling Liberal Democratic Party's (LDP) leadership race last Saturday. The outcome puts her on course to become the country's first female Prime Minister and fueled speculations about more expansionary fiscal policy.
Takaichi is seen as a supporter of the former Premier Shinzo Abe's economic policies, who advocated for heavy spending and monetary stimulus to support the Japanese economy. Takaichi is also expected to oppose any further policy tightening by the BoJ, which, in turn, has been a key factor behind the Japanese Yen's broad underperformance since the start of the current week.
Meanwhile, inflation in Japan has stayed at or above the BoJ’s 2% target for more than three years, and the economy expanded for a fifth straight quarter in the three months through June. Moreover, Takaichi's economic advisors – such as Etsuro Honda and Takuji Aida – were quoted as saying that Japan's new PM would probably tolerate another rate hike either in December or in January.
Furthermore, Takaichi said that she did not want to trigger excessive declines in the domestic currency, providing some respite to the JPY bulls during the Asian session on Friday. Apart from this, the cautious tone around the Asian equity markets assists the safe-haven JPY to recover slightly from its lowest level since February 13, touched against the US Dollar earlier this Friday.
The USD Index (DXY), which tracks the Greenback against a basket of currencies, shot to over a two-month peak on Thursday amid the ongoing political turmoil in Japan and France. The USD bulls seem unaffected by rising bets for two more interest rate cuts by the US Federal Reserve this year and concerns that a prolonged US government shutdown could affect the economic performance.
The government shutdown is now in its second week amid few signs of progress toward a deal to advance funding bills, with the Senate rejecting motions to advance competing bills for the seventh time on Thursday. The Senate will not hold any further votes, and the shutdown will extend until at least next week, when the upper chamber is expected to return on Tuesday.
Friday's US economic docket features the release of the University of Michigan Consumer Sentiment Index, later during the North American session. Apart from this, comments from influential FOMC members would drive the USD and provide some impetus to the USD/JPY pair, which remains on track to register strong weekly gains and post its highest weekly close since late January.

USD/JPY might consolidate before appreciating further amid slightly overbought daily RSI

The overnight close above the 153.00 mark comes on top of the recent breakout through the 151.00 key hurdle and backs the case for further gains for the USD/JPY pair. However, the daily Relative Strength Index (RSI) is flashing slightly overbought conditions and holding back bulls from placing fresh bets. Nevertheless, the broader technical setup suggests that the path of least resistance for spot prices remains to the upside, and any corrective pullback might be seen as a buying opportunity near the 152.60-152.55 region. This should help limit the downside near the 152.00 round figure.

On the flip side, any further move up is likely to confront some resistance near the 153.70-153.75 region. This is followed by the 154.00 mark, above which the USD/JPY pair could accelerate the momentum towards the 154.70-154.80 zone (February 11 swing high) and reclaim the 155.00 psychological mark.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

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