The Japanese Yen rebounds but faces resistance, USD/JPY hovers at a policy crossroads

Asian trading hours, the USD/JPY currency pair is caught in a tug-of-war between bullish and bearish factors. Although the yen has retreated from a weekly high, it still gained new support—more and more market participants believe that the Bank of Japan may start raising interest rates in December, which boosts confidence among traders holding yen positions. Meanwhile, the strengthening expectations of Fed rate cuts are diminishing the attractiveness of the dollar, pushing this currency pair toward around 155.70.

Hawkish signals from Japan’s policy stance are stronger than expected

The Japanese government has recently issued a series of tough signals. Finance Minister Satsuki Katayama warned, quite unusually, that intervention may be taken against excessive volatility, and key decision-maker Takashi Aida further clarified the government’s determination to prevent yen depreciation. These declarations have built a psychological defense line for the yen and serve as a reminder to the market not to overly short the currency.

More importantly, the Bank of Japan has changed its previous silence. Reuters disclosed that the central bank emphasized the inflation risks brought by a weak yen this week, implying that the door to rate hikes is not closed. The meeting between Prime Minister Sanae Sato and BOJ Governor Kazuo Ueda last week appears to have eliminated political opposition. The latest October Producer Price Index for services grew by 2.7% year-over-year, indicating Japan is steadily approaching its 2% inflation target, providing further justification for the BOJ to tighten monetary policy. This series of signals supported the yen’s rebound after overnight declines.

Dollar under pressure, but risk sentiment becomes an “invisible opponent” for the yen

The story on the dollar side is relatively simple: the market is increasingly confident that the Fed will continue cutting rates in December. Even though this week’s US economic data has been mixed, it does not change this expectation, causing the dollar to fall to over a week’s low, with USD/JPY also retreating to around 155.70.

The issue is that strong risk asset performance is weakening the yen’s appeal as a safe-haven currency. Optimistic expectations for peace talks between Russia and Ukraine continue to support market sentiment, and traders’ demand for safe-haven assets is limited. At the same time, Japan’s recent approval of a 21.3 trillion yen economic stimulus plan—its largest since the pandemic—has been pushing up Japanese yields, reducing the yen’s relative yield advantage. In this context, even if the dollar remains weak, the upside for the yen is substantially limited.

Technical outlook: bears have gained the upper hand

From a technical perspective, USD/JPY has formed a short-term bearish pattern. The 100-hour simple moving average is at 156.70, serving as a key support level. If the price can break below this line effectively, it could retest 157.00, then challenge the intermediate resistance at 157.45-157.50, and potentially reach 158.00 (the high since mid-January last week).

Conversely, if the price falls below the overnight low of 155.65, bears may continue to push downward, targeting the psychological level of 155.00. A break below 155.00 would set the stage for deeper declines, with short-sellers possibly using this as a new entry point, driving the market further down toward the downtrend extension at 158.00.

Current trading volume is relatively low, as traders tend to stay on the sidelines ahead of the US holiday. This suggests that a decisive breakout may require more convincing catalysts to emerge.