Yen’s Decline: Japan’s Stimulus and BOJ Face Off Grows as Fed Pauses

Asian foreign exchange markets experienced volatility on Thursday as the Japanese yen dropped to its lowest point in ten months against the U.S. dollar, influenced by a split within the Federal Reserve and Japan’s ongoing fiscal stimulus. The USD/JPY pair

, marking its strongest level since January, as investors adjusted their outlook on Fed rate reductions and considered the effects of Prime Minister Sanae Takaichi’s ¥25 trillion economic package. The yen’s slide from Japan, such as a third-quarter economic contraction, and the Bank of Japan’s (BoJ) continued resistance to raising interest rates.

Minutes from the Fed’s October meeting highlighted significant disagreements among officials, with “many” opposing a rate cut in December while “several” believed one was probable

. This ambiguity has of a 25-basis-point reduction in December to 43%, down from 62% the previous week. ING analysts observed that a pause in December could be brief, but “upcoming key data will ultimately decide,” . The dollar index (DXY) , its highest in seven days, as markets interpreted the Fed’s tone as more hawkish.

In Japan, the yen’s depreciation is being worsened by conflicting approaches between aggressive fiscal spending and cautious monetary policy. Takaichi’s government has

to stimulate wage growth and consumer spending, sending 40-year government bond yields to unprecedented levels. Meanwhile, the BoJ, , remains reluctant to adjust rates until inflation is driven by wage increases rather than energy or food prices. This policy gap has and prompted capital to flow out of the country, adding further strain on the yen.

Japanese officials have , with Finance Minister Satsuki Katayama describing the currency moves as “unilateral and swift.” Still, intervention is seen as unlikely unless USD/JPY surpasses ¥156, a threshold considered more politically than economically significant . Barclays strategists suggest maintaining a long dollar position versus the yen, arguing that Takaichi’s fiscal strategy will keep domestic yields low and continue to weigh on the currency.

The yen’s weakness reflects a broader pattern across the region. Other Asian currencies,

and the Singapore dollar, traded within narrow ranges as investors reconsidered their expectations for rate cuts. Meanwhile, the Australian dollar tested crucial support after falling 0.5%, and the Chinese yuan inched up as loan prime rates remained steady.

Technical analysis indicates that USD/JPY may consolidate in the near term, with the RSI nearing overbought levels and the pair

. Experts warn that a drop below 153.00 could trigger a sharper decline, though the overall upward trend is likely to persist as long as the interest rate gap between the Fed and BoJ remains.

Market participants are now looking to Thursday’s U.S. nonfarm payrolls release for more direction on the Fed’s next steps. A weaker result could momentarily reduce demand for the dollar, giving the yen a short-lived boost

. However, unless Japan shifts its policy stance, the yen’s underperformance is expected to continue, highlighting the difficulties of balancing fiscal expansion with monetary restraint.