Yen's Slide: Japan's Stimulus-BOJ Tug-of-War Intensifies as Fed Stalls

Asia FX markets faced turbulence on Thursday as the Japanese yen hit a 10-month low against the U.S. dollar, driven by a divided Federal Reserve and Japan's expansionary fiscal policies. The USD/JPY pair surged to 157.36, its highest level since mid-January, as traders recalibrated expectations for Fed rate cuts and weighed the impact of Prime Minister Sanae Takaichi's ¥25 trillion stimulus plan. The yen's decline accelerated amid weak economic data from Japan, including a Q3 contraction, and the Bank of Japan's (BoJ) reluctance to raise interest rates.

The Fed's October meeting minutes revealed deep divisions among policymakers, with "many" ruling out a December rate cut while "several" saw one as likely according to reports. This uncertainty has pushed the implied probability of a 25-basis-point cut in December to 43%, down from 62% a week earlier. Analysts at ING noted that a December pause might be temporary, but "hard data releases ahead will have the final say," including the delayed U.S. nonfarm payrolls report. The dollar index (DXY) rebounded to 99.545, its highest in a week, as markets interpreted the Fed's stance as increasingly hawkish.

In Japan, the yen's weakness is exacerbated by a policy tug-of-war between fiscal stimulus and monetary caution. Takaichi's administration has prioritized large-scale spending to boost wages and consumer demand, pushing 40-year government bond yields to record highs. Meanwhile, the BoJ, led by Governor Kazuo Ueda, remains hesitant to normalize rates until wage growth-not energy or food costs-drives inflation sustainability. This divergence has steepened Japan's yield curve and encouraged capital outflows, further pressuring the yen.

Japanese authorities have expressed concern over the yen's sharp depreciation, with Finance Minister Satsuki Katayama calling the FX moves "one-sided and rapid". However, intervention remains unlikely unless USD/JPY breaches ¥156, a level viewed as politically sensitive rather than economically critical according to analysts. Barclays analysts recommend holding a long dollar position against the yen, arguing that Takaichi's fiscal agenda will suppress domestic yields and sustain downward pressure on the currency.

The yen's struggles are part of broader regional trends. Asian currencies, including the South Korean won and Singapore dollar, remained range-bound as investors reassessed rate-cut expectations. Meanwhile, the Australian dollar tested key support levels after a 0.5% decline, while the Chinese yuan edged higher amid unchanged loan prime rates.

Technical indicators suggest USD/JPY could face short-term consolidation, with the RSI approaching overbought territory and the pair clinging to the upper Bollinger Band. Analysts caution that a breakdown below 153.00 could trigger a sharper sell-off, though the broader uptrend remains intact as long as the Fed-BoJ rate divergence persists.

Traders now await the U.S. nonfarm payrolls data, due Thursday, for clarity on the Fed's path. A weaker-than-expected report could temporarily ease dollar demand, offering the yen a brief reprieve according to market analysis. However, without a policy shift in Japan, the yen's underperformance is likely to persist, underscoring the challenges of balancing fiscal ambition with monetary caution.