USD/JPY has been on a steady decline, dropping from 142.95 to 141.65, driven by a combination of domestic and international factors. Japan’s latest economic data, showing a fall in factory output, has cast doubt on the country’s economic recovery, prompting investors to reassess their outlook on the yen. Additionally, the currency pair has been moving in tandem with EUR/JPY, as risk sentiment remains fragile across the board. The political landscape has also contributed to yen strength, with incoming Prime Minister Ishiba, a known critic of Japan’s long-standing easy monetary policy, winning the Liberal Democratic Party (LDP) leadership race. Ishiba’s victory has fueled speculation that Japan could move toward a more cautious approach to monetary stimulus, causing the yen to rally.
Technically, the USD/JPY daily chart remains bearish, with the pair slipping further towards the key support level at 141.65. Momentum indicators are pointing downward, and the pair’s failure to hold above 142 suggests further downside risk. Traders are eyeing the 2024 low of 139.58, which could come into play if bearish sentiment persists. The Nikkei’s sharp decline and a jump in Japanese government bond (JGB) yields following Ishiba’s win have reinforced risk aversion, further supporting the yen. A break below 141 could accelerate selling, especially if Japan’s upcoming election on October 27 brings further uncertainty.
Looking ahead, USD/JPY remains vulnerable as Ishiba’s call for an election has added a layer of political risk to the market. With Japan’s economic recovery in question and Ishiba advocating for a looser monetary policy in some areas while remaining cautious about extreme stimulus, yen bulls may continue to dominate. Meanwhile, broader market sentiment, particularly with respect to U.S. Treasury yields and risk appetite, will also play a crucial role. Should U.S. yields fall or risk-off sentiment deepen, USD/JPY could test the critical 139.58 level in the coming days.