The Japanese yen is gaining modestly against the US Dollar as the North American session approaches. Political shifts in Japan are stabilising the yen, with market participants evaluating the collapse of the governing coalition and its effect on the Bank of Japan and its monetary policies.

The yen’s support is partly due to yield spreads, while its recent decline was driven by sentiment, as shown by USD/JPY’s link to risk reversals. Recent economic data revealed a mix of weaker labour earnings and stronger trade and PPI figures. Market expectations have adjusted, pricing in 4 bps of tightening by October 30 and 14 bps by December for the BoJ, a shift from previous forecasts.

Potential Bearish Reversal

For USD/JPY, a potential bearish reversal could occur if the rate drops below 152.14, while the pair’s rally may be overextended with an RSI of 70. FXStreet Insights Team gathers opinions from market experts, featuring observations from both internal and external analysts.

Other analyses discuss EUR/JPY’s decline amid French political issues, the effect of Trump’s tariff threats on the US Dollar, and the Euro’s response to geopolitical and fiscal pressures. This market landscape presents a complex environment influenced by political and economic factors.

The Japanese yen is showing modest strength against the dollar, driven by political shifts in Japan. The collapse of the governing coalition is creating speculation about the future independence of the Bank of Japan and its plans for raising interest rates. This political uncertainty is currently outweighing other factors for the currency.

Market expectations for a BoJ rate hike have softened considerably over the past week. Overnight index swaps now only price in a 4 basis point hike for the October 30th meeting, a sharp drop from the 14 points anticipated last week. We see this as a sign that traders believe the political turmoil will force the central bank to be more cautious.

Technical Standpoint

From a technical standpoint, the recent rally in the USD/JPY pair appears overextended, with the Relative Strength Index (RSI) hitting 70. A move below the 152.14 level could trigger a significant bearish reversal. We remember the Ministry of Finance intervening heavily back in 2022 and 2024 when the pair approached these levels, which remains a key psychological barrier.

For derivative traders, this environment suggests it may be time to position for yen strength. Buying put options on USD/JPY with expirations after the October 30th BoJ meeting could be a prudent way to capitalize on a potential downturn. This strategy provides downside exposure while limiting risk to the premium paid.

Implied volatility is also increasing, with the Cboe JPY Volatility Index (JYVIX) climbing to 11.5, its highest level since the market jitters in August 2025. This rise suggests options are becoming more expensive but also reflects the market’s expectation of a larger price swing. This makes strategies that profit from volatility itself worth considering.

Finally, we are watching global factors that could add to this move, such as ongoing discussions in the U.S. about potential new tariffs on imported goods. Recent data also showed Japan’s trade surplus widened to ¥850 billion in September 2025, lending some fundamental support to the yen. These external pressures could accelerate a move away from the US dollar.

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