The yen's decline against the US dollar remains unstoppable: economic recession and policy disagreements continue to exert pressure

Technical signals indicate a bullish outlook for the exchange rate, but fundamental risks remain

From a technical perspective, USD/JPY successfully rebounded on Friday from the support level at 153.60 (corresponding to the 100-period simple moving average on the 4-hour chart) and closed above the resistance zone at 154.45-154.50, boosting bullish confidence. The oscillators on the daily chart remain in positive territory and are far from overbought levels, suggesting room for further gains.

If USD/JPY can consolidate above the psychological level of 155.00, it will further establish a bullish pattern and may push towards the intermediate resistance at 155.60-155.65, and potentially the round number at 156.00. However, a break below the recent support at 154.00 could lead to support around 153.60-153.50. A further decline below this zone would draw attention to the round number at 153.00. If this level is broken decisively, short-term traders may shift to a bearish outlook, with next support levels at 152.15-152.10.

Japan’s economic contraction creates a central bank policy dilemma, yen falls into a weak cycle

Data released by Japan’s Cabinet Office on Monday showed the economy contracted by 0.4% quarter-on-quarter in Q3, marking the first decline in six quarters. During the same period, GDP annualized fell by 1.8%, reversing the previous quarter’s growth of 2.3%. Although the decline was less severe than the most pessimistic market forecasts, the impact is enough to shake investor confidence in the Bank of Japan’s rate hike prospects for this year.

Amid the shadow of recession, Prime Minister Sanae Takaichi’s government is preparing a new fiscal stimulus package to ease the pressure on citizens facing rising prices. Takaichi recently stated that a new fiscal expenditure target would be set, allowing for more flexible spending policies over the coming years. This stance further weakens market expectations of a hawkish BOJ, exerting continued pressure on the yen.

Geopolitical risks and official verbal interventions create dual variables

Recent tensions between China and Japan over Taiwan have heightened, with China threatening severe responses. Such geopolitical conflicts typically trigger safe-haven flows into the yen. However, this risk aversion support has not been enough to reverse the overall depreciation trend of the yen.

It is noteworthy that Japanese authorities are increasingly concerned about excessive yen depreciation. Finance Minister Satsuki Katayama announced last week that they would closely monitor forex market developments. Meanwhile, Economy Minister Kineuchi pointed out that a continued weakening of the yen could raise import costs and push up consumer price indices, signaling potential policy interventions. These verbal warnings have temporarily restrained further bearish bets and limited the yen’s decline to some extent.

Fed’s cautious stance and USD/JPY face a new equilibrium

Meanwhile, Federal Reserve policymakers have recently issued cautious signals amid a lack of new economic data. Market expectations for a rate cut in December have diminished, supporting the upward momentum of the US dollar index and USD/JPY.

This Thursday, the delayed US non-farm payroll report will be released, along with the FOMC minutes and speeches by Fed officials, which will be focal points for the market. Investors will look for clues about the Fed’s future rate path, and these data and comments are expected to create new trading opportunities for the dollar.

Investors should remain vigilant, as USD/JPY upside may face a ceiling

Although USD/JPY shows a bullish technical structure, underlying fundamental uncertainties should not be overlooked. The US government budget deadlock’s impact on economic momentum, the ambiguity surrounding the BOJ’s policy path, and the risk of covert interventions in the forex market could all change market expectations at any time.

Therefore, amid the ongoing upward trend of USD/JPY over the past month, traders should avoid overly aggressive new positions. Instead, they should wait for confirmed signals above 155.00 before considering further entries. At the same time, preparations should be made for scenarios where the pair tests support around 154.00.