Throughout the day, the yen failed to meet expectations for intraday gains relative to a softer U.S. dollar, as market participants focused on Japan's evolving political landscape. According to the Kyodo news agency, the Liberal Democratic Party and the Japan Innovation Party (Ishin) are planning to form a coalition. As part of this new alliance, a parliamentary vote will be held on Tuesday to confirm Sanae Takaichi as Japan's first female prime minister.
Takaichi supports the economic policies of her predecessor, Shinzo Abe, which include large-scale fiscal spending and monetary stimulus to support economic growth. She is expected to oppose further tightening by the Bank of Japan (BoJ), which is weighing on the yen. In addition, global trade uncertainties may encourage the BoJ to maintain its current stance at the upcoming policy meeting. However, BoJ Deputy Governor Shinichi Uchida stated on Friday that the central bank will continue to raise interest rates if economic and inflation indicators align with forecasts.
Meanwhile, inflation in Japan has remained at or above the BoJ's 2% target for over three years, and the economy has shown growth for five consecutive quarters, the latest ending in June. This backdrop gives the central bank room to consider another rate hike in December or January.
At the same time, the CME Group's FedWatch Tool shows that traders have fully priced in two 25 basis point rate cuts by the U.S. Federal Reserve—one in October and another in December. This hasn't provided much support for the U.S. dollar and continues to favor the lower-yielding yen.
The U.S. government shutdown has now extended to 20 days, and the Senate is preparing for its 11th vote on a stopgap funding bill. The unresolved deadlock between Democrats and Republicans is limiting upside potential in the USD/JPY pair.
Technical Outlook
From a technical perspective, bullish oscillators on the daily chart support a positive bias for the pair. Immediate resistance lies at 151.40 and 151.75, with the psychological level of 152.00 in sight.
On the downside, support near 150.30 protects against a slide toward another key level at 150.00. A firm break below this mark could lead to a test of Friday's low near 149.40. A continuation of bearish pressure would pave the way toward the next psychological support at 149.00 and potentially lower.
