Yen Vulnerable as Political Risk Mounts in Japan

USD/JPY – Yen Under Pressure Amid Political Turmoil

USD/JPY – Yen Under Pressure Amid Political Turmoil

The Japanese Yen (JPY) remains vulnerable to further depreciation amid intensifying political uncertainty surrounding Prime Minister Shigeru Ishiba’s potential resignation. On Wednesday, reports initially suggested Ishiba might step down, leading USD/JPY to briefly spike above the crucial 147.00 resistance level, before easing back slightly after Ishiba denied these claims. Nonetheless, betting markets, particularly Polymarket, still assign an 81% probability of his resignation occurring, highlighting persistent political instability.

Market Sentiment and Fundamental Drivers:

Political uncertainty continues to be a significant catalyst for volatility in JPY crosses. Ishiba’s weakening approval ratings, largely due to unpopular austerity measures and resistance to VAT cuts, have heightened speculation that a leadership change is inevitable. Conservative candidate Sanae Takaichi is emerging as the favored successor. Her policy stance, favoring aggressive fiscal stimulus measures, may postpone anticipated rate hikes from the Bank of Japan (BoJ), potentially exerting downward pressure on the Yen.

Moreover, recent developments including the Japan-U.S. trade agreement have boosted equity sentiment domestically, further diminishing demand for the Yen as a traditional safe-haven asset. Investors have consequently positioned toward risk-on assets, contributing to the Yen’s depreciation in recent trading sessions.

Technical Outlook:

From a technical perspective, USD/JPY remains in an upward trajectory within a clearly defined bullish channel on the daily timeframe. Wednesday’s price action, temporarily breaking above the psychological 147.00 level, reinforces the strength of bullish sentiment despite intraday volatility.

Resistance Levels: Immediate resistance is now established near Wednesday’s intraday high around 147.15-147.25. A decisive break above this level could pave the way toward the significant 148.00 psychological barrier, with the October highs around 149.00 providing a longer-term target if Ishiba indeed resigns.

Support Levels: On the downside, short-term support resides at 146.20-146.30, aligning with Tuesday’s consolidation range. A breakdown beneath this zone might extend corrective momentum toward the 21-day Moving Average (DMA), currently near 145.50, which serves as a dynamic support line for bullish sentiment.

Momentum and Indicators:

Technical momentum indicators support the bullish outlook. The Relative Strength Index (RSI) currently hovers above 60, indicating underlying positive momentum while remaining below overbought levels, suggesting room for further upside. The MACD remains positively sloped above its zero line, reinforcing bullish bias. Meanwhile, volatility indicators, notably implied volatility derived from FX options markets, continue rising due to political risks, pointing to continued choppy intraday price action.

Conclusion:

Given the prevailing political uncertainties and strong technical bullish momentum, USD/JPY remains biased toward further appreciation. Short-term pullbacks toward key support levels could present buying opportunities, as the overall bullish trend remains intact unless substantial fundamental changes emerge.