Japanese Yen Weekly Forecast: Will LDP Election Result Spur Yen Slide as BoJ Awaits?

USD/JPY Stumbles: US Government Shutdown and Fed Rate Cut Bets Sink the Dollar

USD/JPY dropped below the crucial 147.5 support level. The US government shutdown on September 30 led to a weaker US dollar amid rising bets on multiple Fed rate cuts in the fourth quarter.

USD/JPY slid 1.35% to close at 147.460 in the week ending October 3. A bearish start to the week sent the pair to a low of 146.585 before recovering above 147.

The US government shutdown and US labor market data raised bets on October and December Fed rate cuts, weighing on the US dollar.

Outlook: Politics, Data, and the BoJ in the Spotlight

This week, Sanae Takaichi’s victory in the Liberal Democratic Party (LDP) election is expected to kick-start a volatile week for the yen. Takaichi’s stance on fiscal and monetary policy would likely pressure the Japanese yen. James E. Thorne, Chief Market Strategist at Wellington-Altus, commented on the potential impact of Takaichi’s win on the BoJ’s policy stance, stating:

“Takaichi has repeatedly criticized Bank of Japan interest rate increases, favoring fiscal expansion and sustained monetary accommodation instead. She believes aggressive easing is essential for boosting growth and has stressed the need for pro-growth policies to address rising living costs. Her election has been seen by local bond strategists as a signal that the BoJ is less likely to raise rates in the near term.”

While markets will react to the election result, crucial economic data will also influence USD/JPY trends. Household spending, wage growth, and producer prices would likely affect demand for the yen.

However, traders should also closely monitor the Bank of Japan’s views on the election result and its monetary policy stance.

Will Household Spending Revive Rate Hike Bets?

On Tuesday, October 7, household spending could influence the BoJ’s rate path and appetite for the yen. Economists forecast household spending to increase 0.1% month-on-month in August after soaring 1.7% in July.

A higher-than-expected print could fuel demand-driven inflation, lifting expectations of a fourth-quarter BoJ rate hike. A more hawkish BoJ policy stance would boost demand for the yen, weighing on the USD/JPY pair.

Conversely, an unexpected fall in household spending may signal a softer inflation outlook, easing yen demand.

While inflation remains the focus, household spending will also affect fourth-quarter GDP trends. Private consumption accounts for over 50% of Japan’s GDP, giving household spending a larger weighting as policymakers focus on the effect of US tariffs on the economy.

Will Wage Growth Green Light an October BoJ Rate Hike?

On Wednesday, October 8, wage growth will face scrutiny after BoJ Governor Kazuo Ueda’s recent warning about US tariffs forcing firms to cut wages. Economists expect average hourly wages to rise 4.3% year-on-year in August, up from 3.4% in July.

Higher wages would likely boost private consumption, fueling inflationary pressures and bolstering the economy. A sharper rise in wages may raise expectations of an October BoJ rate hike, lifting demand for the yen.

On the other hand, softer wage growth could potentially delay monetary policy tightening until 2026, given Governor Ueda’s concerns about US tariffs impacting wage growth. He stated:

“If uncertainty regarding overseas economies and trade policies remains high, firms may place stronger emphasis on cost-cutting and may weaken their efforts to reflect price increases in wages.”

Producer Prices, Inflation, and the Japanese Yen

On Friday, October 10, economists expect producer prices to increase 0.1% month-on-month in September, after falling 0.2% in August.

A larger-than-expected rise in producer prices could signal a pickup in demand and higher consumer prices. Producers typically increase prices when demand improves, passing higher costs on to customers. Rising prices may support a more hawkish BoJ rate path as economists view producer prices as a leading indicator of inflation.

Notably, the US dropped tariffs on Japanese goods to 15% in August, easing price pressures on Japanese manufacturers.

However, an unexpected drop in prices may signal a softer inflation outlook and a less hawkish BoJ policy stance. Some economists have speculated that manufacturers may continue cutting prices despite the lower 15% tariff. Fading bets on an October rate hike are expected to weigh on the Japanese yen, sending USD/JPY higher.

Bookmark our real-time updates to stay ahead of USD/JPY volatility.

USD/JPY Outlook: Economic Indicators and the BoJ

• Bullish Yen Scenario: Upbeat Japanese data or hawkish BoJ rhetoric could drag USD/JPY toward 145.
• Bearish Yen Scenario: Weaker data or dovish policy signals may send the pair toward 150.

Capitol Hill, US Data, and Fed Commentary to Influence the Dollar

The US economic calendar will likely determine the likelihood of an October Fed rate cut this week. Labor market data, consumer sentiment, and Fed speakers will be in the spotlight.

Key events include:

• Initial Jobless Claims (October 9): Expected to increase from 218k (week ending September 20) to 223k (week ending September 27).
• Michigan Consumer Sentiment (October 10): Forecast to fall from 55.1 in September to 55.0 in October.
• Nonfarm Payrolls (provisionally October 10): Expected to increase by 39k in September after a 22k rise in August.
• Unemployment Rate (provisionally October 10): Forecast to remain at 4.3% in September.
• Average Hourly Earnings (provisionally October 10): Expected to rise 3.7% year-on-year in September, mirroring August’s increase.

Weaker-than-expected US labor market data and consumer sentiment could fuel bets on aggressive Fed rate cuts. A more dovish Fed rate path would weigh on the US dollar and the USD/JPY pair.

On the other hand, stronger-than-expected labor market data and an upswing in consumer confidence could signal a less dovish Fed policy stance. Fading bets on multiple Fed rate cuts in the fourth quarter would lift US dollar demand and send USD/JPY higher.

Traders should be aware that the labor market data may face more delays if lawmakers fail to pass a stopgap funding bill. The US government shutdown postponed last week’s jobless claims data and the US jobs report.

Beyond the data, traders should also monitor Fed speeches, including remarks from Fed Chair Powell on Thursday, October 9. There is also a wave of Fed speakers scheduled throughout the week and the FOMC meeting minutes to consider.

Short-term Forecast:

• Bullish US Dollar Scenario: Strong US economic data or hawkish Fed rhetoric may send USD/JPY toward 150.
• Bearish US Dollar Scenario: Weaker US data or dovish Fed signals could push USD/JPY toward 145.

USD/JPY Price Action

Daily Chart

On the daily chart, USD/JPY trades below the 50- and 200-day Exponential Moving Averages (EMAs), signaling a bearish bias.

A breakout above the 50- and 200-day EMAs could pave the way toward the 149.358 resistance level. A sustained move through 149.358 may bring the August high of 150.917 into play.

On the downside, a break below last week’s low of 146.585 could expose the crucial 145 support level. If breached, the July low of 142.681 would be the next key support level.

Key Takeaway

The USD/JPY pair’s drop below 147.5 reflects shifting sentiment toward the Fed and the BoJ’s policy stances.

This week’s data, central bank commentary, and politics will likely fuel price volatility. Closely monitoring real-time developments will be essential as both the Fed and the BoJ’s October monetary policy decisions loom.

Consult our economic calendar for historical and upcoming data.