USD/JPY consolidated near 160.25 on Wednesday, close to its highest level since late July, as a global bond sell-off and the carry trade keep weighing on the yen. The Bank of Japan is set to debate a rate increase at its Sept. 17-18 meeting, while the dollar draws support from safe-haven demand and Fed rate hike bets.
USD/JPY consolidated near 160.25 on Wednesday, hovering close to its highest level since late July, as the yield on 10-year Japanese government bonds rose to 3% for the first time since 1996. The pair also hovered at 160.21 per dollar, remaining pinned above the psychologically critical 160 threshold.
Fiscal worries and the carry trade weigh on the yen
Rising Japanese bond yields are increasing the cost of servicing Japan's massive national debt, heightening concerns about fiscal sustainability. Prime Minister Sanae Takaichi's plans for large-scale investment add another layer of uncertainty, as markets fear aggressive fiscal policy could further complicate the debt situation.
Even so, borrowing costs in Japan remain significantly lower than in the US and other major economies, so the carry trade continues to weigh on the yen. That gap persists even as expectations of a Bank of Japan rate hike keep rising.
BOJ moves toward a September rate decision
Bank of Japan Governor Kazuo Ueda confirmed the Governing Council will debate a rate increase at its Sept. 17-18 policy meeting, focusing on whether energy-driven price pressures threaten medium-term price stability. BOJ board member Hajime Takata further bolstered hawkish expectations by advocating for a more nimble rate path.
According to Investing.com: US Treasury Secretary Scott Bessent pressed Japanese officials at the G20 gathering in North Carolina for "decisive" action to address persistent yen weakness. Meanwhile, 10-year Treasury yields are pushing toward 4.81%, keeping widening yield differentials in the dollar's favor.
Dollar draws support from safe havens and Fed bets
The dollar is also drawing support from safe-haven demand amid escalating US-Iran tensions, and growing expectations of a Fed rate hike driven by inflation risks tied to higher oil prices. That keeps the fundamental backdrop for USD/JPY moderately positive. Ahead of Friday's Nonfarm Payrolls report, however, market participants may avoid making more aggressive bets on further gains.
Technical picture points to a near-term pullback
On the H4 chart, USD/JPY is undergoing a correction, and a further pullback toward 158.97 is possible today, followed by a potential rebound and a return to the ascending channel. The first upside target sits at 160.27, followed by 160.67, with the MACD histogram still above zero but beginning to decline.
Meanwhile, on the H1 chart, USD/JPY is testing 159.65 as the correction develops. A test of 158.97 followed by a rebound could open the way higher, with the first target at 160.27 resistance, a scenario the Stochastic oscillator supports with its signal lines below 20.0.
Sources: ActionForex, Investing.com
Trading involves risk.
Risk Disclaimer
