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The Japanese yen has reached its lowest level against the U.S. dollar since early August, maintaining the groundwork for further declines. The unexpected results of the elections in Japan are pushing the country toward expansionary fiscal policy, complicating the Bank of Japan's task of controlling inflation and stimulating the economy. In addition, market participants have already started to factor in the likelihood of a rate hike by the Bank of Japan by the end of the month, which explains the yen's weak position.
Asian stock indices continue to follow Wall Street's rally. This further undermines the yen's role as a safe-haven asset. Meanwhile, data published in Japan showed that household spending in August grew faster than forecast, indicating the need for tighter monetary policy by the regulator and providing some support to the yen. At the same time, expectations of a dovish Federal Reserve policy are slowing the U.S. dollar's strengthening, limiting the upward momentum of USD/JPY.
According to Japan's Ministry of Internal Affairs, household spending in August rose by 2.3% year-over-year, marking growth for the fourth consecutive month. These results confirm the Bank of Japan's intention to continue raising rates, despite the election of Sanae Takaichi as the leader of the Liberal Democratic Party (LDP). Takaichi, who advocates large-scale budget spending, is set to become Japan's first female prime minister after the parliamentary session in mid-October. Such expectations increase pressure on the central bank and contribute to further yen weakness.
On Monday, the Nasdaq and S&P 500 indexes reached new all-time highs, fueling investor interest ahead of the Q3 corporate earnings season. Japan's Nikkei 225 index also hit a fresh high, and in the context of anticipated more active economic policy, this is undermining the position of the Japanese currency.
The U.S. dollar is recovering after pulling back from its September peak, thereby pushing USD/JPY toward new highs last seen in August. At the same time, market participants lack the conviction to extend the dollar's rally due to expectations of Fed rate cuts. According to CME's FedWatch data, the chances of a 25-basis-point rate cut by the Fed in October and December stand at around 95% and 84%, respectively. In addition, concerns about a prolonged U.S. government shutdown are limiting the growth potential of both the dollar and the USD/JPY pair.
The U.S. federal government has remained shut down for six consecutive days, while the Senate adjourned without reaching a budget agreement. Democrats rejected the Republicans' spending bill, demanding continued healthcare subsidies for the population.
This week, markets await speeches from key FOMC members, particularly Fed Chair Jerome Powell on Thursday. On Wednesday, the release of the meeting minutes may shed light on potential rate cuts amid economic risks—an event that will influence the dynamics of the U.S. dollar and the USD/JPY pair.
From a technical perspective, yesterday's breakout of the psychological level of 150.00 favors the bulls. Moreover, oscillators on the daily chart remain in positive territory, indicating that the path of least resistance for spot prices is upward. What's more, prices have already broken the August high around 151.00.
On the other hand, corrective pullbacks are likely to find solid support at the 150.70 and 151.00 levels.
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