Under the depreciation pressure of the Japanese yen, the yen's rebound faces multiple constraints

Policy Intervention Signals Push Up the Yen Short-Term

Japanese Finance Minister Satsuki Katayama issued the strongest warning to date last week, stating that the government will take measures as necessary to address excessive volatility and disorderly market movements. This statement immediately sparked market concerns about official intervention. Cabinet members such as Takumi Aida emphasized that Japan can actively intervene in the foreign exchange market to mitigate the impact of yen weakness on the economy. Under these signals, the yen (JPY) gained brief support during Tuesday’s Asian trading session, and short positions became more cautious.

However, the upward momentum driven by policy rhetoric may be difficult to sustain. On one hand, mixed signals from Federal Reserve (Fed) officials have weakened the dollar (USD) rally, putting pressure on the USD/JPY currency pair. On the other hand, fundamental factors impose fundamental constraints on the yen’s appreciation prospects.

Fiscal Deterioration and Central Bank Policy Uncertainty Double Down

Last week, Japan’s Cabinet approved an economic stimulus package totaling 21.3 trillion yen, the largest since COVID-19, with plans to approve a supplementary budget as early as November 28 to raise funds. This move heightened market concerns over Japan’s government debt outlook, pushing the ultra-long-term Japanese government bond yields to historic highs and further pressuring the yen.

Economic data are also concerning. Japan’s Q3 economy unexpectedly contracted for the first time in six quarters, potentially forcing the Bank of Japan (BOJ) to delay rate hikes. However, BOJ Governor Ueda Kazuo expressed an open attitude toward a December rate increase, believing that yen depreciation could push up prices. Japan’s inflation has remained above the BOJ’s 2% target for over three years, creating a contradictory situation that adds uncertainty to the central bank’s policy path and becomes a significant obstacle to yen rebound.

Fed Rate Cut Expectations Suppress the Dollar and Limit Yen’s Upside

In contrast, Fed officials such as Christopher Waller stated on Monday that current data support a 25 basis point rate cut in December, while New York Fed President John Williams described current policy as moderately restrictive. The market quickly responded, with the probability of a rate cut at the December 10 Fed meeting rising to about 80%.

This expectation, in turn, limits the recent performance of the dollar. Although the USD reached its highest level since late May, its support against the yen remains limited. Positive risk sentiment further diminishes the appeal of the safe-haven yen. Traders are now awaiting the release of this week’s US Producer Price Index (PPI), retail sales data, pending home sales, and the Richmond Manufacturing Index, which will be key to short-term dollar direction.

Technical Outlook: 157.00 Becomes a Key Reversal Confirmation Level

From a technical perspective, USD/JPY needs to confirm and hold above the multi-month high of 157.00 to support new bullish bets. If a breakout is confirmed, subsequent gains could reach the intermediate resistance zone of 157.45-157.50, challenging the weekly high of 157.85-157.90. Breaking through the round number of 158.00 would open a new breakout scenario.

On the downside, attention should be paid to support zones at 156.25-156.20. A break below 156.00 would see the pair test the mid-line support at 155.45-155.40, potentially retreating to the psychological level of 155.00. Further declines could find strong support around 154.50-154.45, which may serve as a critical turning point. Traders should closely monitor today’s and later this week’s key economic data to seize short-term directional opportunities.