When Sanae Takaichi found the Bank of Japan’s independence beneficial, she emphasized it. However, the slowdown in inflation allowed the prime minister to change her stance. Her toughness towards the BoJ is driving USD/JPY quotes higher. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of Japan will welcome two new doves.
- China has tightened export controls on rare earth elements.
- The risks of currency interventions are growing.
- Long positions on the USD/JPY pair can be opened above 156.3.
Weekly Fundamental Forecast for Yen
In 2024, Sanae Takaichi called the Bank of Japan’s rate hike a “stupid” idea. Since then, she has repeatedly asked that her speech not be mentioned in parliament. However, sooner or later, the prime minister’s dovish stance was bound to come to light. As soon as that happened, the USD/JPY pair soared.
Sanae Takaichi’s reluctance to recall the past had a specific reason. The BoJ’s sluggishness in normalizing monetary policy leads to a weaker yen and, in theory, accelerates consumer prices. However, as soon as the CPI slowed to its lowest level since January 2024 and core inflation slumped to its lowest level since March 2022, the prime minister changed her stance.
Japan Inflation Rate
Source: Bloomberg.
According to Mainichi, Sanae Takaichi expressed concern about the markets’ expectations of an overnight rate hike during a meeting with Kazuo Ueda. The prime minister allegedly took a tough stance. Monetary tightening raises bond yields and increases debt servicing costs. This is extremely unpleasant news for the government.
Perhaps Mainichi’s report is a rumor, but events that followed showed that there is no smoke without fire. Sanae Takaichi nominated two doves to replace the retiring members of the Governing Board. Both appointees support accommodative monetary policy and fiscal stimulus.
The market quickly realized that it had been fooled. After the election, the head of government spoke of financial discipline, which investors interpreted as political stability. With this in place, money was supposed to return to Japan, and the USD/JPY rate was expected to plunge. According to SMBC Nikko Securities, the pair could fall to 142. This is especially true if Tokyo and Washington carry out a joint coordinated intervention, which they hint at from time to time.
The government seems to have no choice but to intervene in the Forex market. Long pauses in the Fed’s monetary expansion and the Bank of Japan’s monetary restriction cycles paint a clearly bullish picture for the USD/JPY pair. Moreover, Sanae Takaichi wants to revive the economy with large-scale fiscal stimulus, while China bans exports of critical rare-earth elements to Japan, leaving the yen vulnerable.
Markets severely punish attempts to mislead them. Sanae Takaichi turned out to be a wolf in sheep’s clothing, and now the government will have to dig deep into its pockets to temper USD/JPY bulls. As the pair moves higher, the risks of currency intervention will likely grow dramatically.
Weekly USDJPY Trading Plan
Against this backdrop, long positions formed on a breakout of 153.95 appear to be a sound strategy. If the USD/JPY pair remains above 156.3, long positions can be increased.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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