The Japanese yen retreated on Friday as investors watched the new political developments in Japan’s political environment. The USD/JPY exchange rate dropped to 152.62, down from this week’s high of $153.45.

Japanese yen rebounds as ruling coalition collapses

The USD/JPY exchange rate has been in a strong uptrend this week as investors cheered to the recent party elections in which Sanae Takaichi became the leader of the ruling party.

Takaichi has long favored policies similar to those advocated by the late Shinzo Abe, which were known as Abenomics. She favors low interest rates and more stimulus policies to boost the country’s economy.

The risk, however, is that the political situation has changed as the ruling coalition collapsed. In a statement, the Komeito party said that it was leaving the coalition with the Liberal Democratic Party.

While LDP still has the majority analysts believe that she will lack the votes required to push some of her proposals, especially if the LDP party fails to replace Komeito with the Ishin or DPP parties. 

Such deals will likely have concessions, which may prevent her from implementing some of her policies. In a note, an analyst from OCBC said:

“The earlier slump in the yen this week was due to perceived policies associated with PM-to-be Takaichi while markets pushed back on the BOJ hike normalization timeline. Now that they have lost their long-time partner, this suggests she may not be able to push through some of her policies as swiftly, and that the earlier slump in the yen may pare back.”

Focus on the Bank of Japan

The USD/JPY exchange rate also jumped this week because of the ongoing US dollar rebound, with the DXY Index jumping to $99.2 from the year-to-date low of $96.42, where it formed a double-bottom pattern.

Looking ahead, forex traders are focusing on the upcoming Bank of Japan (BoJ) meeting. Most economists expect the bank to maintain rates at the current level of 0.50% as officials embrace a wait-and-see approach.

They also expect the bank to deliver a rate hike in the last meeting of the year as inflation remains higher than the 2% target. The bank may decide to hike so that it can demonstrate its independence from the new political situation.

The other main risk for the USD/JPY exchange rate is that the US government shutdown is continuing, leading to a  prolonged data drought. For example, the Bureau of Labor Statistics did not publish the latest non-farm payrolls data on Friday, and it will not release the latest consumer inflation report next week if the shutdown continues.

USD/JPY technical analysis 

USDJPY price chart | Source: TradingView

The daily timeframe chart shows that the USD/JPY exchange rate has been in a strong uptrend in the past few months, moving from a low of 139.95 in April to the current 152.7. 

It recently moved above the important resistance level at 150, the highest point in August. It also formed a golden cross pattern, which happens when the 50-day and 200-day Exponential Moving Averages (EMA) cross each other.

Therefore, the most likely scenario is where the pair retreats and retests the support at 150.96 and then resumes the uptrend later this year.

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