USD/JPY Breaks Through 158 Level, Japan Faces Dilemma

Recently, currency market volatility has intensified, with USD/JPY once reaching 157.78, just a hair away from the 158.0 round number. What exactly is driving this upward momentum? In simple terms, the conflicting policies of the Bank of Japan and the government are fueling market sentiment.

Weak Economic Data and Rising Calls for Stimulus

Japan’s Q3 GDP contracted at an annualized rate of 1.8%, marking the first negative growth in six quarters. Facing economic difficulties, the Tokyo Metropolitan Government plans to add approximately 14 trillion yen to this fiscal year’s budget, further increasing from last year’s 13.9 trillion yen. This massive stimulus package will be announced on Friday, and the market is generally concerned that the unexpectedly strong policy measures will burden Japan’s finances.

Clash Between Rate Hike Expectations and Market Bets

Contradictorily, the Bank of Japan is contemplating a rate hike plan. BOJ Policy Board Member Junko Koide recently hinted that an interest rate increase could start as early as December (decision to be announced on December 19), implying that “monetary policy normalization” is a done deal. This creates a structural conflict with the government’s massive stimulus measures.

Investors are troubled—if the central bank raises rates while the government significantly loosens policy, the market could fall into policy chaos. As a result, funds are selling off Japanese bonds and the yen, pushing USD/JPY to new highs, with the 10-year Japanese government bond yield rising to 1.842%.

Persistent Inflationary Pressures and a Vicious Cycle of Yen Depreciation

Statistics show that Japan’s key inflation indicators have remained near or above the BOJ’s target for three and a half years in a row. Meanwhile, real wages in September have declined for the ninth consecutive month, putting clear pressure on household purchasing power. Even more concerning, the continued weakening of the yen will further push up domestic prices.

What Do Market Institutions Think?

Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, pointed out that if the credibility of the Takashi government’s policies is damaged, investors might start selling various assets. The firm is prepared to respond to market volatility by shorting short-term bonds and other measures.

Hiroshi Mukaoka, Chief Strategist at T&D Asset Management, expressed concern that the stimulus package of 25 trillion yen is indeed staggering, and questioned its necessity. He warned of a potential “triple decline in stocks, bonds, and currencies,” similar to the market turmoil when Liz Truss took office in the UK in 2022. Singapore strategist Alex Loo also believes that if the Takashi government announces a “large-scale budget,” long-term Japanese bond yields are likely to rise, and the pressure for USD/JPY to depreciate could extend to the 160 level.

Technical Outlook: 160.0 as the Next Key Resistance and Support Zone

From the daily chart, the RSI indicator has entered overbought territory, reflecting that the exchange rate is accelerating higher, maintaining a short-term bullish trend. If USD/JPY stabilizes around 157.0, further upward movement toward the 160.0 round number is possible. Traders should closely monitor the timeframe around November 27, remaining alert to potential trend reversal risks.