The Japanese yen continued its strong plunge this week as investors braced for a return of Abenomics. The USD/JPY exchange rate rose to 153, its highest point since February 13, and up by about 10% from its lowest level this year.
Why the Japanese yen is crashing
The USD/JPY pair surged this week as investors reacted to the ongoing US dollar rebound. The US Dollar Index has jumped in the past few weeks, moving from the year-to-date low of $96 to $98 today, with traders in the options market expecting it to continue the uptrend.
Technical analysis also suggests that the DXY Index will bounce back in the coming weeks as it has formed a double-bottom pattern,..which often leads to more upside over time.
The Japanese yen has also plunged as investors prepare for Abenomics-like policies now that Sanae Takaichi has won the leadership of her part, setting her up for the premiership.
Takaichi is viewed as being more friendly to the stock market and bad for the Japanese yen because she favors more spending, stimulus measures, and low interest rates.
Her policy proposals are significantly different from what the Bank of Japan (BoJ) is doing. It started hiking interest rates last year, moving them from the negative level to the current 0.50%. Officials have maintained their openness to hiking further this year or in 2026.
They have pointed to the current state of inflation, which has constantly remained above the 2% target this year. On the negative side, Japan’s inflation will likely remain under pressure now that the yen has crashed, which will make it more expensive to import energy.
The Japanese yen has plunged as investors continue to question the BoJ’s independence, especially when it continues its delay in raising interest rates. However, a Bloomberg analyst noted that the bank will likely hike rates to remove the notion that it is not independent. He said:
“Markets could start questioning the BOJ’s independence if it hesitates to raise rates. Amid the delicate balance between politics and central banking, it remains plausible the BOJ will continue with its tightening stance.”
USD/JPY forecast
USDJPY technical chart | Source: TradingView
The USD/JPY exchange rate has been in a strong uptrend in the past few weeks and is now hovering near its highest level since February.
It is common for assets to either jump or crash after an election as investors anticipate the new policies. For example, most clean energy stocks plunged after Donald Trump won in the last election.
In most cases, this performance is usually a knee-jerk reaction as assets then adjust to the new normal.
The daily timeframe chart shows that the USD/JPY exchange rate surged after Takaichi’s victory. It has moved above the important resistance level at 150 and also formed a golden cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) have crossed each other.
Therefore, the most likely scenario is where the USD to JPY exchange rate pulls back and retests the support level at 150.
This price action is known as a break-and-retest, and is one of the most common bullish continuation sign in technical analysis. If it happens, it will likely drop and retest the support at 150.92.
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