Policy Divergence and Carry Trade Push USD/JPY to 154.00 Amid Intervention Risks

The U.S. dollar's recent resurgence against the Japanese yen has intensified scrutiny over the USD/JPY pair, which hovered near 154.00 in early November, reflecting a complex interplay of political uncertainty in Washington, cautious Federal Reserve messaging, and mixed signals from Japan's economic recovery.

The pair, a barometer of transpacific economic relations, has oscillated between bearish and bullish pressures as policymakers and markets grapple with divergent monetary trajectories.

The U.S. government shutdown-the longest in American history-has exacerbated market volatility by delaying critical economic data, including October employment and inflation reports. This data vacuum has forced investors to rely on private-sector indicators, creating a "reluctant correction" in the dollar after its recent gains. Federal Reserve Chair Jerome Powell's recent remarks, emphasizing that rate cuts are "not a foregone conclusion," have reinforced a measured approach to policy adjustments. Despite this, the Fed's hawkish undertones have tempered expectations for a December rate cut, with markets now pricing in a 50% probability of a cut, down from 66.9% just weeks prior.

Meanwhile, Japan's economic data has offered a mixed picture. While September's Labor Cash Earnings rose 1.9% year-on-year-matching forecasts-the country's Q3 GDP contracted 0.4% quarter-on-quarter, marking the first decline in six quarters. The Bank of Japan (BoJ) has maintained its 0.50% interest rate, with policymakers signaling a "gradual normalisation" path, contingent on sustained inflation and wage growth. Prime Minister Sanae Takaichi's fiscal stimulus package, estimated at 17 trillion yen ($110 billion), aims to cushion households from rising living costs but risks further weakening the yen by signaling prolonged accommodative policy.

The widening yield gap between the U.S. and Japan has become a pivotal driver for USD/JPY. With the U.S. at 4.00% and Japan near 0.50%, the structural carry trade-where investors borrow in low-yielding yen to fund dollar assets-has intensified demand for the greenback. This dynamic is reinforced by the Fed's recent shift to a "patient" stance, which has pushed the probability of maintaining rates at 4.00% in December to 54.25%, up from 5.49% in October. Conversely, the BoJ's reluctance to tighten, despite internal discussions about future rate hikes, has left the yen structurally disadvantaged.

From a technical perspective, USD/JPY faces key resistance near 155.00, with a break above this level potentially triggering renewed bullish momentum. However, Japanese officials have repeatedly warned against "one-sided and rapid currency moves," with Finance Minister Satsuki Katayama emphasizing "urgent monitoring" of the yen's depreciation. Historical precedents, such as the 2024 yen-buying intervention that reversed a 1.8-yen intraday surge, suggest the government may act if the pair breaches 155.00.

For businesses and individuals engaged in U.S.-Japan transactions, the pair's volatility has tangible consequences. A weaker yen enhances the purchasing power of U.S. dollars for Japanese imports, benefiting American firms paying in yen. Conversely, Japanese entities receiving dollar inflows face reduced yen value. The uncertainty underscores the importance of hedging strategies, with many corporations locking in forward contracts around 153.50 to mitigate risks.

Key catalysts for the pair in the coming weeks include the resolution of the U.S. government shutdown, the release of delayed economic data, and the BoJ's December policy meeting. The Fed's December meeting will also be pivotal, with a potential shift in rate-cut expectations likely to influence dollar demand. For now, USD/JPY remains in a tactical range of 152.00–155.00, with the balance of forces favoring the dollar but constrained by intervention risks and Japan's fiscal expansion.