Geopolitical Tensions and Policy Uncertainty Weigh on Yen Rally; Technical Setup Suggests Caution for Bulls

Why Japanese Yen Bulls Are Losing Momentum

The Japanese Yen (JPY) has recovered modestly from a fresh one-year low against the weakening US Dollar (USD) during early Asian trading on Monday, but the rally lacks conviction. While escalating geopolitical tensions—including reports of potential military intervention by the US in Iran and the ongoing Russia-Ukraine conflict—typically drive safe-haven demand toward the JPY, traders appear reluctant to commit aggressively to Yen strength.

The primary culprit? Deepening uncertainty within Japan itself. Reports that Prime Minister Sanae Takaichi is considering a snap parliamentary election in early February have injected political noise precisely when investors need clarity on monetary policy direction. Combined with lingering doubts about the timing of the next Bank of Japan interest rate hike, this domestic uncertainty is effectively capping any bullish Yen moves.

Adding fuel to the fire, China’s ban on dual-use goods and rare earth element exports to Japan—triggered by diplomatic tensions over Taiwan—threatens supply chains for Japanese manufacturers. This headwind could weigh on the Yen’s appeal as a fundamental play on Japan’s economic outlook.

The Dollar’s Weakness Provides Limited Support

The USD/JPY pair has slipped to the mid-157.00s, driven more by Dollar weakness than Yen strength. The culprit: growing concerns about US Federal Reserve independence. Fed Chair Jerome Powell disclosed that the Department of Justice is threatening criminal indictment, a move he characterized as political pressure aimed at influencing monetary policy away from the Fed’s independent assessment.

This credibility challenge for the Fed—combined with disappointing December employment data (Nonfarm Payrolls at 50K versus 60K expectations)—has temporarily dented the Dollar’s appeal. However, the unemployment rate did fall to 4.4% from 4.6%, keeping rate-cut expectations alive for 2025.

The widening policy divergence between a potentially easing Federal Reserve and a hawkish Bank of Japan (BoJ Governor Kazuo Ueda recently reiterated plans to continue raising rates) should theoretically support the JPY. Yet political and geopolitical headwinds are offsetting this advantage, keeping Yen bulls cautious.

Technical Picture Flashes Warning Signs

From a technical standpoint, the USD/JPY pair maintains a bullish structure above the 200-period Simple Moving Average on the 4-hour chart, currently sitting at 156.14. The Moving Average Convergence Divergence (MACD) remains constructive, with the line above the signal line and in positive territory, while the histogram sustains its bullish alignment.

However, the Relative Strength Index (RSI) above 70 signals overbought conditions that warrant caution for bulls. An RSI reading above 70 historically tends to precede corrective pullbacks, and traders should treat any dip as a potential unwind of stretched positioning rather than the start of a full reversal.

As long as the pair holds above the 200-period SMA, bulls retain structural control. A break below this level would open the door to a meaningful pullback. Immediate upside momentum may be capped by overbought RSI readings, making patience the prudent approach ahead of crucial US inflation data—the Consumer Price Index (CPI) and Producer Price Index (PPI) due Tuesday and Wednesday.

Understanding the Japanese Yen’s Core Drivers

The Japanese Yen remains one of the world’s most actively traded currencies, with its value shaped by multiple layers of influence. The Bank of Japan’s monetary policy stance serves as the primary determinant, supplemented by the yield differential between Japanese and US sovereign bonds and broader risk appetite dynamics.

The BoJ maintains a mandate for currency control and has occasionally intervened directly in forex markets to manage Yen depreciation, though such interventions remain infrequent due to political sensitivities among trading partners. Between 2013 and 2024, the Bank of Japan’s ultra-accommodative stance created a significant policy gap versus other major central banks, particularly the US Federal Reserve, which allowed the Yen to weaken substantially.

As the BoJ gradually normalizes policy in 2024, combined with the Federal Reserve’s pivot toward rate cuts, the yield differential is narrowing. This convergence should theoretically support the Yen, though political risks and domestic electoral uncertainty are currently offsetting that advantage.

Historically, the Yen functions as a classic safe-haven currency. During periods of market stress and heightened uncertainty, capital typically flows into JPY due to its perceived stability and the JPY carry trade’s structural dynamics. This property makes the Yen a natural beneficiary during geopolitical crises—yet current dynamics suggest that even flight-to-safety demand faces headwinds from Japan’s own political and economic uncertainties.