Insights 
VT 
USD/JPY gained strength to approximately 153.05 during the early Asian session on Friday. The rise was supported by the stronger US dollar, as tensions surrounding the ongoing US government shutdown persisted.
The Japanese Yen (JPY) stayed under strain, with concerns rising following Sanae Takaichi’s election as the leader of Japan’s ruling party. Traders worry about potential increased fiscal spending in Japan and reduced expectations of an interest rate hike by the Bank of Japan.
Market Reaction to New Leadership
Takaichi mentioned she does not intend to intentionally weaken the Yen excessively. She acknowledged there are both advantages and disadvantages to a weak Yen.
In the US, the Senate was at a standstill regarding legislation to end the government shutdown. Market participants are monitoring the duration of the shutdown, as it may impact the US economy and apply downward pressure on the USD.
Later on Friday, focus will shift to the U-Mich Consumer Sentiment report and Federal Reserve officials’ speeches. Any dovish remarks could affect the USD’s position against the JPY shortly.
The Japanese Yen is influenced by the Japanese economy’s performance, BoJ policies, bond yield differentials, and global risk sentiment. Its safe-haven status attracts traders during market volatility, boosting its value against riskier currencies.
Potential Intervention Risks
The USD/JPY is trading firmly above 153.00, a significant level that demands our attention. This move is being driven by a strong US dollar, despite the ongoing US government shutdown which has now reached its tenth day. The market is also reacting to uncertainty from Japan’s new leadership, which is weighing on the yen.
We see the interest rate differential as the primary factor supporting this trend for now. The US 10-year Treasury yield is holding steady near 4.6%, while the latest data shows Japan’s 10-year bond yield is only at 1.1%. This significant gap makes holding US dollars far more profitable than holding Japanese yen, encouraging the carry trade.
However, trading above 153.00 puts us in a high-risk zone for intervention by Japanese authorities. We saw them enter the market to defend the yen back in 2022 and again in 2024 when the currency weakened past similar levels. The recent verbal warnings from officials suggest they are prepared to act again if this move continues.
This elevated risk of a sudden, sharp reversal means implied volatility on USD/JPY options will likely increase. Traders should consider buying short-dated yen call options or USD/JPY put options to hedge against a potential intervention. This provides protection from a sudden drop while limiting the upfront cost.
We must not completely dismiss the US government shutdown, as the market currently seems to be doing. Looking back at the 35-day shutdown in 2018-2019, we saw that prolonged closures eventually harm economic growth and consumer confidence, which ultimately weakens the dollar. If this situation isn’t resolved soon, sentiment could shift against the USD very quickly.
The upcoming University of Michigan Consumer Sentiment report and comments from Fed officials will be crucial. After the September CPI report showed inflation still sticky at 3.8%, any hint from the Fed that they are concerned about the shutdown’s economic impact could be interpreted as dovish. This could pull the dollar back without any action needed from Japan.
