Japanese Yen Forecast: USD/JPY Rallies on Japanese Stimulus Package Hopes

USD/JPY Key Points

• Japan’s new PM Sanae Takaichi has instructed her cabinet to assemble a large fiscal stimulus package.
• The fiscal/monetary policy alignment between the US and Japan is, at least for the moment, large.
• For USD/JPY bulls, the next level to watch will be last week’s 8-month high near 153.25.

Japan’s first female Prime Minister, Sanae Takaichi, isn’t wasting any time getting started on her agenda. Within hours of her official election, she formed her cabinet and instructed them to put together “large economic stimulus” package to tackle inflation. As an advocate of Modern Monetary Theory (MMT) and protégé of Shinzo Abe, she is not afraid to endorse large deficit spending to support the economy and stave off deflation, so traders are anticipating that the package will exceed last year’s $92B package, with potentially large implications for the yen and Nikkei 225.

While traders will undoubtedly scrutinize the package closely once it’s revealed, the differing alignments of fiscal (increasingly loose in Japan, at-least-temporarily-due-to-the-shutdown tighter in the US) and monetary (tightening bias in Japan, easing bias in the US) policy are already having an impact on the USD/JPY exchange rate, as we outline below.

Japanese Yen Technical Analysis: USD/JPY Daily Chart

Source: StoneX, TradingView

Looking at the chart, USD/JPY’s uptrend has officially crossed six months since bottoming on April 22^nd. Over that period, the pair has consistently put in higher highs and higher lows, though its only retraced about two-thirds of its January-April drop so far.

More immediately, USD/JPY bounced off previous-resistance-turned support in the 149.90-150.00 area on Monday, forming a “Bullish Pin” candlestick pattern in the process. For the uninitiated, a Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken, as we saw earlier this week.

For bulls, the next level to watch will be last week’s 8-month high near 153.25 with a break above that barrier opening the door for a continuation toward the 78.6% Fibonacci retracement near 155.00 next. Meanwhile, a downside break of 149.90 support, if seen, would hint at a likely continuation down to the bullish trend line off the April lows near 148.00.

-- Written by Matt Weller, Global Head of Research

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