Japanese Yen Forecast: USD/JPY Rises as Fiscal Stimulus Pressures Yen

USD/JPY hovers in 2024’s intervention zone of 155-160 on Monday, November 24, raising risks of government action to bolster the Japanese yen.

Prime Minister Sanae Takaichi’s fiscal stimulus announcement leaves the yen in a precarious position. Fading bets on a December Bank of Japan rate hike and a potential pullback in inflationary pressures could weaken the yen, sending USD/JPY higher.

The USD/JPY rally to a 10-month high of 157.893 on Thursday and Friday’s sharp pullback underscored market sensitivity to yen intervention warnings and dovish Fed rhetoric. Last week’s USD/JPY movements set the stage for a volatile session on Monday, November 24.

Japan Fiscal Stimulus in Focus

Prime Minister Sanae Takaichi’s cabinet approved a ¥21.3 trillion ($136 billion) stimulus package on Friday, November 21. The package comprises ¥900 billion in special account spending, ¥2.7 trillion in tax cuts, and ¥17.7 trillion in spending. The fiscal package aligns with Prime Minister Takaichi’s support for fiscal policy and ultra-loose monetary policy.

Unlike fiscal stimulus packages in other countries that typically fuel inflation, Japan’s package aims to combat higher prices. Notably, the ¥2.7 trillion in tax breaks includes abolishing a gasoline sales tax surcharge and raising the income threshold for income tax. Economists view these measures as having a low impact on near-term demand.

However, economists have raised concerns about the ¥20,000 per child under 18 cash handout, which may boost demand and inflationary pressures. While the package seeks to provide near-term relief, structural components such as tax cuts may lift demand and fuel inflation later.

Crucially, the package has raised criticism over fiscal sustainability, sending Japanese Government Bond (JGBs) yields soaring, reflecting waning confidence in the yen. 10-year yields hit their highest since 2008, while 40-year yields reached historic highs above 3.6%.

Economists Raise the Alarm Over the Package and the Yen

Robin Brooks, Senior Fellow at the Brookings Institution, commented on the fiscal stimulus package and yen weakness, stating,

“Japan’s Yen in real effective terms is almost as weak as Turkish Lira, which is the world’s weakest currency after Erdogan eviscerated his central bank. Japan is in denial on debt. Sanae Takaichi’s fiscal stimulus makes this worse…”

James E. Thorne, Chief Market Strategist at Wellington Altus, previously commented:

“Sanae Takaichi, the “Iron Lady of Japan,” has revived Abenomics-style stimulus that will expand global liquidity through fiscal easing and ultra-loose credit. Her policies strengthen the yen carry trade and the U.S. dollar, gold’s pullback should not be a surprise. Contrary to popular belief, the “death of the dollar” is greatly exaggerated. King Dollar is alive and well.”

On Monday, November 24, debates over the fiscal stimulus package and BoJ commentary will influence USD/JPY trends. Traders should also monitor yen intervention warnings from the Japanese government if USD/JPY climbs toward 160.

Meanwhile, US economic data will also play a crucial role in driving USD/JPY trends through its impact on Fed rate expectations.

US Economy and Fed Speakers in Focus

Economists forecast the Chicago Fed National Activity Index (CFNAI) to drop from -0.12 in August to -0.2 in October. Furthermore, economists expect the Dallas Fed Manufacturing Index to rise from -5.0 in October to -1.0 in November.

CFNAI will likely face greater scrutiny given that the index captures the entire US economy, including manufacturing and services. Economists view the CFNAI as a broader economic barometer since it considers production, employment, personal income, and sales. By contrast, the manufacturing sector contributes around 10% to the US GDP.

A sharper-than-expected fall in the CFNAI could signal a loss of economic momentum midway through Q4, supporting a more dovish Fed policy stance. USD/JPY may drop toward 155 on a lower CFNAI reading.

Beyond the data, traders should closely monitor FOMC members’ speeches after last week’s shift in sentiment toward Fed rate cuts. According to the CME FedWatch Tool, the chances of a December Fed rate cut jumped from 44.4% on November 14 to 71.0% on November 21.

Growing support for a December cut could weaken demand for the US dollar and push USD/JPY toward 150.

USD/JPY Scenarios: Diverging Monetary Policies

• Bearish USD/JPY Scenario: Hawkish BoJ chatter, intervention threats, softer US data, and dovish Fed comments could drag USD/JPY toward 150.
• Bullish USD/JPY Scenario: Dovish BoJ rhetoric, stronger US data, and hawkish Fed comments could send USD/JPY toward 160.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Key Market Drivers to Watch Today:

• Bank of Japan commentary.
• Intervention threats.
• US data.
• Fed speakers.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.