Japan's Fiscal Moves Risk Undermining BoJ Credibility Amid Yen Weakness

The Japanese yen's sharp depreciation has intensified speculation about intervention by policymakers and reignited debates over the Bank of Japan's (BoJ) policy trajectory. Recent political developments, including Sanae Takaichi's victory in the Liberal Democratic Party leadership race, have fueled expectations of a return to expansionary fiscal and monetary policies reminiscent of "Abenomics." However, analysts caution that Japan's economic landscape has evolved significantly since those days, with inflationary pressures and structural shifts complicating policy choices. The USD/JPY pair has surged above 150.63, reflecting heightened demand for the dollar amid yen weakness and global market uncertainty.

Rabobank analysts noted that while markets initially anticipated continuity with former Prime Minister Abe's agenda, Japan's economy has diverged from its past trajectory. The bank emphasized that investors are now scrutinizing how Takaichi's administration will balance fiscal activism with the BoJ's policy independence. Takaichi's recent pragmatic stance on monetary policy-contrasting with her earlier criticism of the BoJ's rate hikes-has softened concerns about direct political interference. However, Rabobank warned that any fiscal measures prioritizing government control over monetary policy could undermine investor confidence, given the yen's close ties to the BoJ's credibility. The bank maintains a three-month USD/JPY forecast of 145, assuming a BoJ rate hike by year-end.

Intervention risks have escalated as the yen's decline approaches critical thresholds. Danske Bank highlighted that historical precedents, such as the 2022–2023 intervention at a 4% two-week yen drop, suggest potential intervention if USD/JPY breaches 154–155. Finance Minister Katsunobu Kato has already signaled preparedness to address "excessive or disorderly movements" in the yen, while Bank of America analysts noted that intervention may be delayed during the current government transition period. The U.S. dollar's strength, driven by political instability in Japan and Europe, has further pressured the yen. The Dollar Index (DXY) hit a two-month high, with USD/JPY trading near 153.00 as of late October.

The BoJ's policy normalization path remains uncertain. Governor Haruhiko Kuroda has emphasized cautious optimism, citing progress in balance-sheet normalization through ETF sales. A potential October rate hike, the bank's first in years, could bolster the yen and reinforce market confidence in the BoJ's independence. However, Takaichi's advocacy for "demand-driven inflation"-where wage growth drives moderate price increases-aligns with the BoJ's long-term goals but lacks immediate clarity. Analysts at Rabobank stressed that Japan's inflationary pressures, while persistent, remain contested in origin. If inflation is driven by domestic wage growth, rate hikes become a viable tool; if transitory and import-dependent, further tightening may be unnecessary.

The yen's volatility has broader implications for global markets. The yen carry trade, which involves borrowing in low-yielding yen to invest in higher-yielding assets, has resurged, with estimates of the trade's size reaching $14 trillion. A sudden yen appreciation could force unwinding of leveraged positions, triggering sell-offs in equities, bonds, and cryptocurrencies. Bitcoin, for instance, faced downward pressure in August 2024 as the BoJ's rate hike triggered a yen rebound and a 10% correction in the S&P 500. Analysts warn that a similar scenario could recur if the BoJ raises rates to stabilize the yen, though such a move risks disrupting Japan's bond market and spilling over into U.S. equities.

Technical indicators suggest USD/JPY remains vulnerable to corrections. The pair has pulled back from 153.30, with the RSI in overbought territory and the 20-period moving average at 152.20 acting as a key resistance. A break below 150.00 could trigger further declines toward 147.50, while a sustained rally above 154.80 would test long-term bullish momentum. Market participants are also monitoring U.S. economic data, including consumer sentiment and inflation expectations, for clues on Fed rate cuts that could influence dollar demand.

Sources:

[1] US Dollar to Yen Forecast: Three-month USD/JPY (https://www.exchangerates.org.uk/news/44210/2025-10-07-us-dollar-to-yen-forecast-three-month-usd-jpy-forecast-of-145-say-rabobank.html)

[2] USD/JPY Outlook: Yen on Edge Amid Policy Divergence (https://www.forexcrunch.com/blog/2025/10/10/usd-jpy-outlook-yen-on-edge-amid-policy-divergence-political-chaos/)

[5] Yen intervention risk rockets higher as USD/JPY nears 155 (https://investinglive.com/centralbank/yen-intervention-risk-rockets-higher-as-usdjpy-nears-155-trigger-line-in-the-sand-20251008/)

[6] Is Bitcoin Safe From the Upcoming Yen Liquidity Shock? (https://beincrypto.com/japanese-yen-carry-trade-crisis-global-market-risk/)