Higher oil prices lift import costs, keeping Japanese Yen subdued

Elevated crude oil prices pressure Japan's energy-importing economy, leaving the Japanese Yen struggling amid uncertainty over Israel's election.
Markets price in a December rate rise, although the Bank of Japan is expected to leave rates unchanged this Friday.
3.75%-4.0% is the Federal Reserve's expected target range after today's decision. Investors are watching for December policy signals.

158.00 is the approximate level for USD/JPY in Wednesday's Asian session. The pair is advancing for a fourth consecutive day as higher crude oil prices put the Japanese Yen (JPY) under pressure. Rising energy costs are renewing cost pressures on major energy-importing economies.

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

Uncertainty over Israel's election results lifted oil prices as global financial markets monitored a vote that could alter the direction of the Middle East conflict. With counting still under way, exit polls indicate a close race between Prime Minister Benjamin Netanyahu and opposition leader Gadi Eisenkot. Neither bloc has a clear majority. Despite the stalemate, early results suggest waning support for Netanyahu, a dominant figure in Israeli politics who has led the country through nearly three years of conflict.

After raising rates by a cumulative 50 basis points earlier in the year, the Bank of Japan (BoJ) is widely expected to leave them unchanged at Friday's policy meeting. Policymakers are pausing to evaluate the effects of earlier tightening. Nevertheless, market participants still anticipate a further increase before year-end, with pricing heavily favouring a December move.

For the Federal Reserve (Fed), expectations also favour an unchanged benchmark rate at Wednesday's decision, keeping the target range at 3.75% to 4.0%. The CME FedWatch Tool puts the market-implied probability of an October hold at 92.8%. With markets assigning an 84.4% probability to a December rate rise, investors will scrutinise Fed Chair Kevin Warsh's comments for clues to the policy path.

Technical Outlook:

At 158.00 on the daily chart, USD/JPY retains a positive bullish bias above its short- and medium-term Exponential Moving Averages (EMAs). Just beneath the spot price, the 50-period EMA stands at 157.96 and the nine-period EMA at 157.76, indicating 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.

The 50-period EMA near 157.96 provides the first downside support. Below it, the nine-period EMA at 157.76 strengthens the nearby demand zone if prices retreat. In a deeper decline, more distant structural support sits around 127.51 at the broader FXS Fed Sentiment Index base. This is well below current spot levels and functions primarily as a longer-term macro reference.

Chart Analysis USD/JPY — USD/JPY: Daily Price Chart

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

Japanese Yen: Key Questions

Which factors shape the Japanese Yen's value?

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

How does Bank of Japan policy affect the Japanese Yen?

Currency control is one of the Bank of Japan's mandates, making its actions important for the Yen. At times, the BoJ has intervened directly in foreign exchange markets, usually to weaken the currency. Political concerns among Japan's main trading partners, however, discourage frequent intervention. Between 2013 and 2024, its ultra-loose monetary stance weakened the Yen against major peers as the policy gap between the BoJ and other leading central banks widened. More recently, the gradual withdrawal of that ultra-loose policy has provided some support for the currency.

What does the Japan-US bond yield gap mean for the Japanese Yen?

By maintaining ultra-loose monetary policy over the past decade, the BoJ increasingly diverged from other central banks, notably the US Federal Reserve. That divergence helped widen the yield gap between 10-year US and Japanese bonds, supporting the US Dollar against the Japanese Yen. The gap is now narrowing as other major central banks cut interest rates and the BoJ follows its 2024 decision to gradually exit ultra-loose policy.

How does risk appetite influence the Japanese Yen?

Investors often regard the Japanese Yen as a safe-haven asset. During periods of market stress, its perceived stability and reliability make them more likely to move funds into the currency. As a result, turbulence is likely to lift the Yen against currencies considered riskier investments.