Why is the Japanese Yen subdued as higher oil prices drive up import costs?

Pressure on the Japanese Yen persists as elevated crude oil prices burden Japan's energy-importing economy, with uncertainty over Israel's election adding to the backdrop.
Markets are pricing in a December rate hike, although the Bank of Japan is expected to leave interest rates unchanged this Friday.
Investors await December policy signals as the Federal Reserve is expected to retain its 3.75%-4.0% target rate today.

Pressure on the Japanese Yen (JPY) is supporting USD/JPY, which is trading near 158.00 in Wednesday's Asian session as it advances for a fourth straight day. Rising crude oil prices are weighing on the Yen by renewing cost pressures on major economies dependent on energy imports.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

With global financial markets watching Israel's unfolding election count for its potential to alter the direction of the Middle East conflict, oil prices moved higher. Exit polls indicate a close contest between Prime Minister Benjamin Netanyahu and opposition leader Gadi Eisenkot, with the two tied and neither bloc securing a clear majority while counting remains under way. Even with the result deadlocked, early figures suggest that support is weakening for Netanyahu, a dominant figure in Israeli politics who has led the country through nearly three years of conflict.

A pause in interest rates is widely anticipated when the Bank of Japan (BoJ) meets this Friday. Policymakers are assessing the effects of earlier tightening after raising rates by a cumulative 50 basis points earlier in the year. Nevertheless, market participants still expect a further increase before year-end, with pricing pointing strongly towards a December hike.

An unchanged benchmark rate is also expected from the Federal Reserve (Fed) on Wednesday, leaving its target range at 3.75% to 4.0%. The CME FedWatch Tool puts the market-implied probability of a hold at the October meeting at 92.8%. With markets also assigning an 84.4% probability to a December rate hike, investors will scrutinise comments from Fed Chair Kevin Warsh for indications of the policy path ahead.

Technical Analysis: Can USD/JPY Sustain Its Bullish Bias?

A bullish bias remains intact on the USD/JPY daily chart, with the pair at 158.00 and spot trading above both its short-term and medium-term Exponential Moving Averages (EMAs). Just beneath the price, the 50-period EMA stands at 157.96 and the nine-period EMA at 157.76, pointing to underlying buying interest on dips. Meanwhile, a 14-day Relative Strength Index (RSI) reading of around 52 places momentum in neutral-to-positive territory, rather than signalling overbought conditions.

Any pullback would first encounter support near 157.96 at the 50-period EMA, while the nine-period EMA at 157.76 adds strength to the nearby demand zone. Further down, the broader FXS Fed Sentiment Index base around 127.51 provides more distant structural support. Given its considerable distance from current spot prices, however, that level mainly acts as a longer-term macro reference.

Chart Analysis USD/JPY — USD/JPY: What Does the Daily Chart Show?

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Japanese Yen: Common Questions

Which factors shape movements in the Japanese Yen?

Among the world's most actively traded currencies, the Japanese Yen (JPY) derives its value broadly from the performance of Japan's economy. More specific influences include the Bank of Japan's policy stance, the gap between Japanese and US bond yields, and traders' appetite for risk, alongside other factors.

Why do Bank of Japan policy decisions matter for the Japanese Yen?

Currency control forms part of the Bank of Japan's mandate, making its actions important for the Yen. At times, the BoJ has intervened directly in currency markets, usually to weaken the currency. It avoids frequent intervention, however, because of political concerns among Japan's principal trading partners. Between 2013 and 2024, its ultra-loose monetary policy widened the policy gap with other major central banks, driving the Yen lower against its main currency peers. More recently, a gradual withdrawal of that exceptionally loose stance has provided some support to the Yen.

Why does the Japanese-US bond yield gap matter for the Yen?

By maintaining ultra-loose monetary policy over the past decade, the BoJ allowed its stance to diverge increasingly from those of other central banks, most notably the US Federal Reserve. This helped widen the yield gap between 10-year US and Japanese bonds, supporting the US Dollar relative to the Japanese Yen. That differential is now narrowing as the BoJ gradually moves away from ultra-loose policy following its 2024 decision, while other major central banks cut interest rates.

Why does changing risk sentiment influence the Japanese Yen?

Investors often regard the Japanese Yen as a safe-haven asset, turning to it during periods of market stress because of its perceived stability and reliability. As a result, turbulent market conditions are likely to lift the Yen against currencies considered riskier investments.