The three-way tug-of-war for USD/JPY: Intervention Expectations, Political Variables, and the Dollar's Rebound

The USD/JPY has experienced a dizzying tug-of-war over the past week. On one hand, concerns about the Bank of Japan and the U.S. jointly intervening to weaken the yen continue to rise, supporting the yen’s movement; on the other hand, domestic political uncertainties in Japan and the dollar’s own rebound strength have become two major obstacles to yen appreciation. This clash of forces is currently shaping the future direction of the exchange rate.

Yen Strengthens Amid Intervention Expectations, but Election Results Introduce Uncertainty

Japanese Finance Minister Shunichi Suzuki recently signaled a window of opportunity for policymakers. He stated that Japan would stay closely coordinated with U.S. authorities based on the September agreement and respond with policy measures if necessary. This comment initially boosted the yen, as markets began reassessing the likelihood of joint intervention—a traditional tool used to counter yen depreciation.

However, the shadow of upcoming elections has cast a pall over market sentiment. Prime Minister Sanae Takaichi promised that if the Liberal Democratic Party wins the February 8 snap election, the consumption tax on food will be suspended for two years. While attractive to voters, this pledge has deepened global investor concerns about Japan’s fiscal sustainability. As a traditional safe-haven asset, the yen should benefit from increased political uncertainty, but fiscal risks have undermined this advantage.

The policy minutes from the Bank of Japan’s January meeting reveal a hawkish tilt among policymakers. They explicitly discussed the inflationary pressures from a weaker yen—implying a somewhat optimistic view on yen appreciation. This subtle shift in attitude has added some support to the yen, but overarching political uncertainties continue to limit further gains.

Dollar Maintains Rebound Momentum, Central Bank Leadership Turnover Adds Support

The dollar’s performance has far exceeded pessimistic market expectations. After hitting a four-year low last week, the dollar has rebounded strongly over the past few days. According to the latest data from the Institute for Supply Management, the U.S. January manufacturing PMI rose to 52.6, marking its first positive growth in a year, a dramatic recovery from 47.9 the previous month. This robust data has helped solidify the dollar’s rebound and is a key factor preventing further declines against the yen.

More importantly, a leadership change at the Federal Reserve has added new support for the dollar. Former Trump administration Fed Governor Kevin Warsh is set to replace Jerome Powell as Fed Chair, pending Senate approval. Warsh is known for his hawkish stance, having repeatedly warned that rising inflation expectations should be met with vigilance. Markets generally believe that Warsh’s appointment, compared to Powell’s more dovish approach, could reinforce the Fed’s inflation alertness, providing additional support for the dollar.

Meanwhile, the Trump administration recently announced a trade agreement with India, reducing tariffs on each other’s goods immediately. This move boosts investor confidence in global economic cooperation and diminishes the demand for traditional safe-haven assets. Signs of easing tensions between Iran and the U.S. further reduce global risk premiums, supporting positive risk sentiment, which in turn weighs on the yen as a safe haven.

Political and Fiscal Concerns Form an Invisible Ceiling on Yen Gains

While intervention expectations and the Fed’s hawkish stance provide upward momentum for the yen, political and fiscal risks act as an invisible ceiling. The February 8 snap election has concluded, but the fiscal commitments made still hang over the Japanese market like Damocles’ sword.

If the policy to suspend the consumption tax for two years is implemented, it would further strain Japan’s already fragile fiscal situation. This obvious risk of expanding deficits suppresses long-term yen buying interest among international investors. Even if the central bank hints at possible rate hikes, such fiscal background makes it difficult for the market to sustain a long-term bullish stance on the yen.

The generally optimistic tone in the stock market also erodes demand for the yen. When global risk sentiment improves, the appeal of traditional safe-haven assets like the yen diminishes naturally. In this environment, traders seeking safety need to be more cautious, as the fundamental environment may not support extreme safe-haven positions.

Technical Outlook Indicates USD/JPY Needs to Break Key Levels

From a technical perspective, USD/JPY is caught in a critical consolidation zone. The spot price is struggling around the midpoint of a recent decline from 159.23 to 152.10—that is, the 50% Fibonacci retracement level. This level holds significant psychological importance for both bulls and bears.

A decisive break above 156.45 could unlock further upside potential. This level not only includes the 61.8% Fibonacci retracement but also coincides with the 200-period simple moving average (SMA) on the 4-hour chart—currently near 156.50 and trending downward, maintaining a generally heavy market tone. The key point is that USD/JPY is trading below this long-term moving average; any rebound approaching it may face selling pressure.

Momentum indicators present mixed signals. The Moving Average Convergence Divergence (MACD) remains in positive territory and above its signal line, but the histogram is shrinking, indicating waning upward momentum. The Relative Strength Index (RSI) sits at 61, above the midpoint of 50, but has not entered overbought territory. This tepid technical picture suggests that unless the price can sustain a break above the 200-SMA, the recent rebound may be merely corrective rather than a trend reversal.

Bears should remain cautious, as failure to establish a foothold above 156.45 could lead to further downside, with potential declines toward new support levels. Traders are currently awaiting U.S. JOLTS job openings data for additional directional clues, but the mixed macro fundamentals advise caution before making new directional bets on USD/JPY.