Japanese Yen Forecast: USD/JPY Breaks Out on Fiscal Crisis Fears

USD/JPY Key Points

• With the yen falling and Japanese bond yields on the rise, the Japanese economy is vulnerable to a budget crisis akin the UK’s in 2022.
• Komeito’s failure to endorse Japan’s new PM-apparent Sanae Takaichi is an ominous omen for her tenure.
• For USD/JPY, there’s little in the way of technical resistance until 155.00 (the 78.6% Fibonacci retracement) and then the 159.00 zone beyond that.

If you were actively trading this time three years ago, this current environment may feel eerily familiar.

Back in September 2022, the UK selected Liz Truss as its next Prime Minister. At the time, the pound sterling was in a clear downtrend while UK sovereign yields were on the rise. A few weeks later, Truss’s Finance Minister, Kwasi Kwarteng, introduced a “mini-budget” focused on fiscal stimulus (large-scale borrowing and tax cuts) for the economy, and the market soundly rejected the budget, driving long-term UK government bond yields to multi-decade highs and the pound to multi-decade lows against most of major rival currencies:

Source: StoneX, TradingView

Liz Truss ultimately dismissed Kwarteng a few weeks later and then resigned, making her the shortest-serving UK Prime Minister in UK history.

It’s cliché to say that “history doesn’t repeat but it does rhyme,” but there are some eerie parallels with Sanae Takaichi’s nascent tenure as Japan’s Prime Minister. Last weekend, Takaichi was selected as the leader of the ruling LDP party, making her the Prime Minister apparent. Takaichi is seen as a protégé of Shinzo Abe, who advocated heavily for fiscal and monetary stimulus to support the moribund Japanese economy. Like the pound three years ago, the yen has been in a clear downtrend for months, and Japanese bond yields have been rising consistently for years:

Source: StoneX, TradingView

Much like Truss at the outset of her tenure, Takaichi’s leadership has encountered early turbulence, as Komeito, the LDP’s coalition partner, hesitated to endorse her, sparking doubts about her grip on power. While we have yet to see a catalyst akin to Kwartung’s mini-budget fiasco, the yen is hitting multi-decade lows against the euro and pound, while longer-term sovereign yields are surging.

With yields rising at the same time that the yen is falling, the Japanese economy is highly vulnerable to any additional setbacks, especially given the country’s extreme sovereign debt load:

Source: IMF

Japanese Yen Technical Analysis: USD/JPY Daily Chart

Source: StoneX, TradingView

Looking at the chart above, USD/JPY is in the midst of a huge three-day, post-election surge, rising more than 500 pips from Friday’s close to today’s high. More to the point for technically-inclined traders, the rally has taken the pair through previous resistance at 150.80 and the 61.8% Fibonacci retracement of the H1 drop at 151.65. From here, there’s little in the way of technical resistance until 155.00 (the 78.6% Fibonacci retracement) and then the 159.00 zone beyond that.

While the short-term price momentum remains strong, the pair is now peeking into “overbought” territory on the 14-day RSI, hinting at the potential for a near-term pullback if we get any kind of positive political news out of Japan. That said, traders would likely look to buy any short-term dips as long as the breakout above 150.80 (and the longer-term fiscal issue) remains intact.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX