Sanae Takashi government prepares to act, USD/JPY critical point is approaching

The Bank of Japan and the government are facing dual pressures. Following the Prime Minister Fumio Kishida’s cabinet recently passing a ¥21.3 trillion economic stimulus plan, markets are beginning to worry about further deterioration of Japan’s fiscal situation. Meanwhile, USD/JPY reached a ten-month high of 157.89 last week, just one step away from the psychological level of 160, sparking widespread discussions about policy intervention.

Dense Policy Signals Released, Intervention Imminent

Japan’s government advisor Takashi Wada recently stated that the Fumio Kishida cabinet will adopt a more proactive stance to intervene in the foreign exchange market to reverse the yen’s weakness and mitigate its adverse effects on the economy. At the same time, the Bank of Japan continues to issue warnings. BOJ Policy Board Member Masayoshi Amamiya revealed that the central bank is approaching a decision to raise interest rates and will not wait until next spring’s wage negotiations. Ueda Kazuo even hinted that the BOJ will tighten policies to support the yen.

This series of signals indicates that Japan’s decision-makers have recognized the urgency of the situation. The yen’s continued depreciation has pushed up import costs, thereby raising domestic prices. Official data show that Japan’s key inflation indicators have exceeded the BOJ’s 2% target for 43 consecutive months, the longest overshoot since 1992. In October, CPI rose 3% year-on-year, accelerating by 0.1 percentage points from September; core CPI increased from 3% to 3.1%.

Risks of Stagflation, Policy Dilemma

Worryingly, Japan’s Q3 GDP contracted at an annualized rate of 1.8%, marking the first negative growth in six quarters. The slowdown in economic growth coupled with high inflation has put Japan’s government and the BOJ in a stagflation-like dilemma—large-scale fiscal stimulus could further worsen fiscal health, while aggressive rate hikes might intensify economic downturn pressures.

Strategists generally believe that pure intervention measures are unlikely to reverse the overall downward trend of the yen but may slow its decline. To truly reverse the USD/JPY trend, a multi-pronged approach is needed: the BOJ must advance policy normalization, the government needs to demonstrate fiscal discipline to rebuild credibility, and the dollar also needs to weaken in coordination.

Fed Signals Dovish Stance, Increasing Yen Pressure

In contrast, the Federal Reserve has recently signaled a potential rate cut. Fed Vice Chair Williams hinted that a rate cut could be initiated in December to balance maximum employment with inflation targets. Market expectations are also rapidly adjusting—traders’ bets on a rate cut next month have risen to over 50%.

Interestingly, the U.S. Bureau of Labor Statistics canceled the scheduled release of October CPI on November 7 and postponed the November CPI release from December 10 to December 18. The delay of key data releases, combined with dovish remarks from Fed officials, has led investors to bet on rate cuts despite the lack of hard data support.

In the medium term, divergence in monetary policies between the U.S. and Japan may lead to a downward bias in USD/JPY, but investors should remain cautious of increased short-term volatility, especially when the BOJ actually intervenes.

Technical Signals Show Overbought Conditions, Time Window Approaching

The daily chart of USD/JPY shows clear overbought characteristics. The chart indicates that USD/JPY has ended four consecutive days of gains and formed a daily top divergence pattern, with RSI entering overbought territory. These technical signals suggest that bullish momentum may be weakening.

Notably, around November 26 will be a critical time window. If market sentiment reverses, USD/JPY could turn around its rally since April. From a technical perspective, investors should focus on the support level at 153.30. Short-term volatility may significantly increase, presenting both risks and opportunities.