Japan's economy falls into recession, with the yen's trend under pressure and difficult to attract buying interest

Economic Data Deterioration Weakens Expectations of Central Bank Rate Hikes, Yen Depreciation Pressure Increases

The latest third-quarter economic data released by Japan’s Cabinet Office is disappointing. Statistics show that Japan’s economy contracted by 0.4% quarter-on-quarter from July to September, marking the first decline in six quarters. During the same period, GDP fell by 1.8% year-on-year, contrasting sharply with the 2.3% growth in the previous quarter. Although this data did not reach the most pessimistic market expectations, it fully exposed the fragility of Japan’s economic growth momentum.

Affected by this data, market expectations for the Bank of Japan to initiate rate hikes soon have been significantly revised downward. Investors who had hoped that the central bank would raise interest rates to strengthen the yen are now re-evaluating their timelines. Coupled with increasing political resistance, the outlook for rate hikes has become more uncertain, further intensifying downward pressure on the yen.

Currently, the yen is hovering near a nine-month low against the US dollar. Fundamentally, the combination of weak economic data and chaotic policy signals makes it difficult for the yen to attract institutional buy support. Market participants are generally adopting a wait-and-see attitude, and yen short positions are not rushing to build excessive positions.

Fiscal Stimulus Plans and Central Bank Policy Uncertainty Create Constraints

The Japanese government, led by Prime Minister Fumio Kishida, is preparing a new fiscal stimulus package. This plan aims to alleviate the pressure on households caused by rising living costs. Kishida stated to the media last week that the government will begin formulating a new fiscal target framework, which will be extended over several years and allow for greater flexibility in expenditure arrangements. This ultra-loose fiscal stance objectively conflicts with the Bank of Japan’s normalization policy.

Geopolitical risks have also negatively impacted the yen. After Kishida’s comments about Japan possibly participating in a military conflict involving Taiwan, both China and Japan issued stern warnings. In response, Beijing threatened to take serious consequences, which undoubtedly increases the likelihood of regional tensions escalating. Market participants often sell the yen due to such uncertainties, seeking safer assets for refuge.

However, concerns about excessive yen depreciation are beginning to surface among Japanese authorities. Japanese Finance Minister Satsuki Katayama publicly stated last week that they will closely monitor foreign exchange market developments. Economy Minister Shunichi Kito also pointed out that further weakening of the yen could raise import costs and ultimately push up domestic price indices, prompting yen short sellers to exercise greater caution when building positions.

Fed Attitude Shift Supports the US Dollar, USD/JPY Gains Momentum

Recently, Federal Reserve policymakers have generally adopted a cautious stance. In the absence of significant economic data, several officials have signaled a slowdown in the pace of rate cuts. This shift directly weakens market expectations for the Fed to continue cutting rates in December, injecting upward momentum into the dollar and USD/JPY currency pair.

At the same time, the US government may face the longest government shutdown in history, which is weighing on investors’ risk appetite for US assets. Therefore, although the dollar receives policy support, it also faces uncertainties from economic data. Non-farm payrolls, FOMC meeting minutes, and speeches by Fed officials will be focal points for the market, potentially providing new trading catalysts for the dollar.

Technical Analysis: Bullish Target Points to 155.00 Psychological Level

From a technical perspective, USD/JPY rebounded effectively on Friday from the support level of 153.60 (corresponding to the 4-hour chart 100-period simple moving average). The closing price closed above the resistance zone of 154.45-154.50, which is a favorable technical signal for the bulls. Oscillator indicators on the daily chart remain in positive territory, still some distance from overbought levels.

If USD/JPY can break through and be effectively accepted above the 155.00 round number, the bullish outlook will be further reinforced. The next target after the breakout is in the 155.60-155.65 intermediate resistance zone, with a potential challenge to the 156.00 round level.

Conversely, if the price falls below the immediate support of 154.00, it may find buying support around 153.60-153.50. If this support is broken, USD/JPY risks falling toward the 153.00 round number. The latter should be viewed as a key turning point; a decisive breach could reverse the short-term technical outlook to bearish, with spot prices potentially sliding further toward the 152.15-152.10 support zone.

Overall, amid Japan’s economic difficulties, central bank policy uncertainties, and the Fed’s attitude adjustments, the medium-term trend of USD/JPY remains inclined to the upside. Investors should closely monitor policy developments and key technical levels when participating.