Yen Extends Losses as Takaichi’s Policy Outlook Fuels Weakness

Key Takeaways:

*Japanese yen continues to weaken sharply amid expectations of fiscally expansive and dovish policies under incoming Prime Minister Sanae Takaichi.

*Concerns mount over Japan’s fiscal health and delayed rate-hike prospects from the Bank of Japan.

*Government officials signal vigilance against excessive currency moves, hinting at possible forex intervention.

Market Summary:

The Japanese yen extended its losses aggressively this week, as markets reacted to expectations that Japan’s incoming Prime Minister Sanae Takaichi will pursue fiscally expansive policies coupled with continued monetary easing. The policy mix is seen as potentially undermining demand for the yen, prompting traders to accelerate selling.

Takaichi’s surprise victory in the ruling Liberal Democratic Party’s leadership race last weekend positions her to become Japan’s first female prime minister. Her expected economic stance — favoring higher government spending and a gradual approach to monetary normalization — has dimmed market hopes for an immediate rate hike by the Bank of Japan (BoJ).

Japan’s inflation has remained at or above the 2% target for over three years, while the economy expanded for a fifth consecutive quarter through June. Yet concerns over fiscal sustainability have grown, as policymakers appear willing to maintain accommodative conditions. Takaichi’s advisors, including Etsuro Honda and Takuji Aida, have suggested that another rate hike may only come in December or January, underscoring the BoJ’s cautious tone.

Meanwhile, Finance Minister Katsunobu Kato emphasized on Friday that authorities are monitoring for “excessive fluctuations” in the currency market and reiterated that the yen should move in line with economic fundamentals. Takaichi herself stated that she does not wish to trigger “excessive declines” in the yen, though investors remain skeptical given her policy agenda.

With the yen’s recent sharp drop, speculation of possible foreign exchange intervention has resurfaced. Should authorities step in to stabilize the currency, the yen could rebound sharply, catching speculative traders off guard. Market participants are therefore urged to remain vigilant, as any signal of intervention could trigger rapid yen appreciation.

Technical Analysis 

UDSJPY, H4

On the technical front, USD/JPY continues to trade higher following a successful breakout above its previous resistance level. The MACD indicator has illustrated rising bullish momentum, confirming strength in the ongoing uptrend. If this momentum persists, the pair may look to retest the next resistance level at 154.65, with a further extension possible toward 158.60.

However, the RSI has entered overbought territory, hovering around 69, suggesting that upside momentum may face short-term exhaustion. A pullback cannot be ruled out, with initial support at 151.60 and deeper support seen near 147.85. A correction toward these levels could attract dip buyers if fundamentals remain yen-negative.

Overall, the yen’s weakening trajectory reflects the market’s skepticism over Japan’s fiscal and monetary direction. While the fundamental bias remains bearish for the yen, traders should be alert for potential intervention risks that could swiftly reverse current trends.

Resistance Levels: 154.70, 158.60

Support Levels: 151.55, 148.00