US Inflation & BoJ Policy Take Center Stage as Japan’s PM Resignation Shakes Yen Markets

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Yen Faces Pressure Following Prime Minister’s Resignation as USD/JPY Awaits Direction

following the weekend resignation of Japan’s Prime Minister Shiger ishiba, the USD/JPY pair experienced initial weakness. However, the market largely remained static, awaiting further cues from the Bank of Japan (BoJ) at its upcoming September adn October meetings.

while next week’s BoJ meeting is unlikely to bring any changes, a potential 0.25% rate increase in October remains on the table. Together, the US is awaiting the release of inflation data, which is forecast to rise slightly to 2.9% year- year.

Yen Under Pressure Amid Succession Speculation

The Prime Minister’s resignation has triggered speculation regarding his successor. Sanae Takaichi, a leading candidate, is a proponent of Abenomics – a policy of ultra-loose monetary policy.This lead to an early-week price gap in yen pairs, suggesting the Yen may have been previously overvalued.However, the BoJ remains a key determinant of the Yen’s value. Recent statements from BoJ Deputy Governor Ryozo Himino have indicated the Bank is open to further interest rate hikes, but without providing a clear timeline. This ambiguity is viewed by the market as a dovish signal.

As the likelihood of a 0.25% interest rate cut this year diminishes,the Yen continues to weaken.It now awaits how Japan’s monetary authorities will respond to growing concerns about tighter monetary policy, from both global voices like Scott Bessent, and domestic leaders such as Takeshi Niinami, chairman of the Japan Executives Association.

US Inflation Data in Focus

US inflation data will be released this Thursday, with forecasts pointing to a rise to 2.9% year-over-year. While an increase to this level is unlikely to substantially alter the mid-september monetary policy decision, it is indeed crucial for shaping expectations regarding policy for the remainder of the year. The possibility of further dovish statements will likely be excluded should inflation climb back above the 3% year-over-year threshold.

USD/JPY Technical Outlook

The recent political shuffle in Japan has not caused a breakout from the 146.50-149 Yen range that USD/JPY has been trading within. This reflects that both the Yen and the US dollar are currently dictated by underlying supply forces, resulting in a lack of clear directional momentum.

A break to the downside will open the way to an attack on the nearest support level around 145 Yen per dollar, while a breakout to the upside will see buyers target resistance near 151 Yen.

[Chart: USD/JPY Price Chart showing the 146.50-149 range]

Disclaimer: This article is for informational purposes only and does not constitute investment advice. All investments carry risk, and any investment decisions are solely the duty of the investor.

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How might a sustained period of higher-then-expected US inflation influence the Federal Reserve’s decision-making regarding future interest rate adjustments?

US Inflation Data: the Dominant Force

The latest US inflation figures remain the primary driver of global market sentiment. While the Federal Reserve has signaled a potential pause in interest rate hikes, persistent core inflation – especially in the services sector – continues to fuel speculation about further tightening.

CPI & PPI Analysis: Recent Consumer Price Index (CPI) and Producer Price index (PPI) reports show a slowing, but not substantial, decrease in inflationary pressures. This ambiguity keeps the door open for the Fed to maintain a hawkish stance.

Impact on US Treasury yields: Elevated inflation expectations are pushing US Treasury yields higher, strengthening the US dollar and impacting global capital flows. The 10-year Treasury yield is a key indicator to watch.

dollar Strength & Global Implications: A strong dollar creates headwinds for emerging markets with dollar-denominated debt and can exacerbate inflationary pressures in countries reliant on imports.

Bank of Japan (BoJ) Policy Under Scrutiny

The Bank of Japan’s ultra-loose monetary policy is increasingly under pressure as global interest rates rise. The BoJ’s Yield Curve Control (YCC) policy – capping long-term interest rates – is facing growing challenges.

yield Curve Control (YCC) Debate: The BoJ’s commitment to YCC is being questioned by market participants, with many anticipating a potential shift in policy in the coming months. any adjustments to YCC could have notable ramifications for global bond markets.

Inflation in Japan: While Japan has experienced a period of deflation for decades, recent months have seen a modest rise in inflation, albeit still lower than in the US or Europe. This is prompting a re-evaluation of the BoJ’s policy framework.

Potential Policy Shifts: Possible scenarios include widening the band around the 0% target for 10-year japanese Government Bonds (JGBs) or even abandoning YCC altogether. These changes would likely lead to higher interest rates in Japan.

Japan’s Political Earthquake: PM Resignation & Yen Volatility

The unexpected resignation of Japan’s Prime Minister, Fumio Kishida, on September 8th, 2025, has injected a new layer of uncertainty into the market, triggering significant volatility in the Japanese Yen (JPY).

immediate Market Reaction: the Yen experienced a sharp sell-off following the announcement, falling to levels not seen in months. This reflects investor concerns about political instability and the potential for a more dovish monetary policy under a new leadership.

Political Uncertainty & Policy Continuity: The key question now is whether the new Prime Minister will maintain the current economic policies, including the BoJ’s ultra-loose monetary policy.A change in direction could have profound implications for the Yen and the Japanese economy.

Safe Haven Demand: Traditionally, the Yen is considered a safe-haven currency. However, the political uncertainty has temporarily diminished its appeal, with investors flocking to the US dollar and other perceived safe assets.

Yen Carry Trade & Risk Sentiment

The combination of low interest rates in Japan and rising rates elsewhere has fueled the Yen carry trade – borrowing Yen at low rates and investing in higher-yielding assets in other countries.

Carry Trade Dynamics: The Yen carry trade has been a significant factor supporting the Yen’s weakness. The political uncertainty and potential for policy changes are increasing the risk associated with this strategy.

Risk-Off Sentiment: A deterioration in global risk sentiment could lead to a unwinding of the Yen carry trade, triggering a sharp appreciation of the Yen.

Impact on Japanese Exporters: A weaker Yen benefits Japanese exporters by making their products more competitive in international markets. However, it also increases the cost of imported raw materials.

Historical Context: Japan’s Economic Challenges

Understanding Japan’s long-term economic challenges is crucial for interpreting current market dynamics.

Deflationary Spiral: Japan has struggled with deflation for over two decades, hindering economic growth and investment.

Aging Population: Japan’s rapidly aging population and declining birth rate pose significant demographic challenges.

Government debt: Japan has one of the highest levels of government debt in the world, limiting its fiscal flexibility.

Practical Tips for Investors

Diversification: Diversify your portfolio across different asset classes and currencies to mitigate risk.

Hedging Strategies: Consider using hedging strategies to protect against currency fluctuations.

Stay Informed: Closely monitor economic data releases, central bank announcements, and political developments.

* Risk Management: Implement robust risk management procedures to protect your capital.

Case Study: The Swiss Franc in 2015

The Swiss Franc experienced a similar shock in January 2015 when the Swiss National Bank (SNB) unexpectedly abandoned its cap on the Franc against the Euro. The Franc surged in value, causing significant