The Japanese Yen still faces depreciation pressure, and the rebound potential may be limited

The Japanese Yen Rebounded on Tuesday but Faces Appreciation Bottleneck Due to Policy Uncertainty

During Asian trading hours, the yen found some relief as cautiousness grew over rumors of government intervention in the foreign exchange market. Meanwhile, the US dollar also entered a consolidation phase amid mixed signals from Federal Reserve officials, temporarily limiting the decline of USD/JPY. However, from a fundamental perspective, the ceiling for the yen’s rebound seems clear—deteriorating Japanese fiscal health and uncertainty over the central bank’s policy path make any meaningful appreciation challenging.

Fiscal Pressure and Economic Weakness Put the Bank of Japan in a Dilemma

Last week, Japan’s Cabinet approved the largest economic stimulus package since COVID-19, totaling 21.3 trillion yen, which directly heightened market concerns over increased government debt. The supplementary budget is expected to be approved as early as November 28, and the yield on ultra-long Japanese government bonds has been pushed to historic highs. To make matters worse, Japan’s economy contracted for the first time in six quarters in Q3, adding pressure on the central bank to delay interest rate hikes.

Although the Bank of Japan (BOJ) Governor remains open to a rate hike in December and emphasizes that yen depreciation could raise inflation expectations, Japan’s inflation rate has exceeded the BOJ’s 2% target for over three consecutive years. This contradictory situation fuels market doubts about the BOJ’s next move. In comparison, signals from Federal Reserve officials point to an 80% probability of a rate cut in December, which in turn dampens the dollar’s upward momentum.

Warnings of Government Intervention Emerge, Short Positions Temporarily Cautioned

Japan’s Finance Minister issued the strongest warning to date last week, stating that measures will be taken as needed to address excessive and disorderly fluctuations, clearly hinting at possible government action. Officials also indicated that Japan has the capacity to actively intervene in the forex market to mitigate the impact of yen depreciation on the economy. These statements are enough to cause concern among traders holding short positions on the yen, providing a temporary respite for the currency.

US Data Awaited, Short-term Trading Opportunities Highlighted

This week’s US economic calendar is packed, with the Producer Price Index (PPI) and retail sales data being key highlights, followed by pending home sales and manufacturing reports. These data points will directly influence the dollar’s movement, creating short-term trading opportunities for USD/JPY. Traders generally prefer to wait until US economic data is released before making new directional bets.

Technical Outlook: Bulls Still in Control, 157.00 as a Key Threshold

From a technical perspective, USD/JPY may remain on hold until it confirms above 157.00. A break above this level would target intermediate resistance at 157.45-157.50, with the potential to reach the 157.85-157.90 zone, and possibly the ten-month high set last week. Breaking through the 158.00 round figure would signal a new breakout and pave the way for further short-term appreciation.

Support levels are identified at 156.25-156.20 as the first line of defense. If it falls below 156.00, the pair could test the 155.45-155.40 zone, followed by the psychological 155.00 level. Any further decline might find support around 154.50-154.45, an area likely to attract buyers and serve as a short-term bottom.

Overall, although the yen has shown some rebound, the outlook remains constrained by fiscal concerns and central bank policy uncertainty, with the USD/JPY maintaining a structurally bullish bias.