USD/JPY forecast: here’s why the Japanese yen is crashing

The Japanese yen continued its downtrend this week, moving to its lowest level since February this year. The USD/JPY exchange rate was trading at 154.70, up sharply from the year-to-date low of 139.86. So, what next go the yen and will the Bank of Japan intervene?

Why the Japanese yen is failing 

The Japanese yen has come under renewed pressure in the past few months, making it one of the worst-performing currencies in the developed world. 

The main reason for the ongoing crash is the recent political changes in the country that saw Sanae Takaichi become the first woman prime minister. 

Takaichi is widely seen as a growth-oriented premier like Shinzo Abe. She has already called for parliament to provide more stimulus funds worth billions of dollars to boost the economy. Additional funds in the economy normally leads to more currency weakness over time. 

The Japanese yen has also dropped because of the Bank of Japan (BoJ), which has been reluctant to hike interest rates as most economists were expecting. Recent inflation numbers show that the country does not need to hike rates as inflation is moving in the right direction.

The most recent report showed that the headline Consumer Price Index (CPI) rose to 2.8% in September from the previous 2.7%. Economists expect the upcoming figure to come in at 2.6%, much lower than the January high of 4.0%.

The ongoing Japanese yen has pros and cons for the country. On the positive side, it is making Japan a relatively cheaper destination for international tourists. It is also benefiting its exporters, especially those selling goods to the United States, where Donald Trump left tariffs on all imports.

On the other hand, a weaker yen can lead to higher inflation since the country imports most of its supplies, like crude oil and natural gas. At the same time, the country could see higher tariffs as Trump has always criticized it for maintaining a weak currency.

Japan has tools to intervene when the yen crashes too much. It can hike interest rates or deploy some of its $1.15 trillion in foreign currency to intervene. For example, it intervened last yrear by buying yen and selling dollars.

The USD/JPY exchange rate will also react to developments in the United States, where the government shutdown is expected to end this week. The House of Representatives will vote for this bill today, a move that will reopen the government.

The end of the government shutdown means that top statistics agencies will start publishing economic numbers on the labor market and inflation. 

USD/JPY technical analysis 

The daily timeframe chart shows that the USD to JPY exchange rate has been in a strong bull run in the past few months. It has jumped from a low of 139.86 in April to 154.55 today. The current level is the highest point since February this year. 

The pair has recently moved above the important resistance level at 153.12, the highest point in October. It formed a golden cross pattern in October as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other.

Top oscillators like the Relative Strength Index (RSI) and the MACD indicators have pointed upwards. Therefore, the most likely scenario is where the pair keeps rising as bulls target the next key resistance level at 156. A move below the support at 153 will invalidate the bullish outlook.