Japanese Yen under pressure as geopolitical risks support the US Dollar

• USD/JPY edges higher on Tuesday as concerns over Japan’s fiscal outlook continue to weigh on the Japanese Yen.
• The persistent interest-rate gap between Japan and other major economies maintains the appeal of carry trades.
• Tensions surrounding Iran support demand for the US Dollar, although the outlook for further monetary tightening in the US remains uncertain.

USD/JPY trades around 159.30 on Tuesday at the time of writing, up 0.15% on the day. However, the pair lacks a clear short-term direction, as concerns surrounding Japan’s public finances and the interest-rate differential between the United States and Japan continue to weigh on the Japanese Yen (JPY).

Investors remain concerned about Japan’s deteriorating fiscal position, as rising long-term bond yields add to the country’s already substantial public debt burden and pressures for expansionary fiscal policy. These factors limit the Yen’s ability to benefit sustainably from periods of risk aversion.

At the same time, Japanese interest rates remain significantly below those of other major economies. The gap between the monetary policy of the Bank of Japan (BoJ) and that of other major central banks therefore maintains the appeal of Yen-funded carry trades, creating a structural obstacle to an appreciation of the Japanese currency.

Rising import costs also pose a risk to the Japanese economy amid supply-chain disruptions linked to the Middle East conflict and tensions around the Strait of Hormuz. With Japan heavily dependent on energy imports, a prolonged period of elevated energy prices could increase pressure on the economy and its trade balance.

These factors have so far largely offset the impact of the coordinated intervention by the United States and Japan in the foreign exchange market in late July. Nevertheless, the prospect of further intervention by Japanese authorities limits aggressive Japanese Yen selling as USD/JPY trades at elevated levels.

On the US side, geopolitical tensions provide some support to the US Dollar (USD). US Treasury Secretary Scott Bessent announced on Monday that the United States is launching a campaign aimed at isolating Iran from the global economy, warning that countries continuing to do business with Tehran could face US sanctions.

In response, Secretary of Iran’s Supreme National Security Council Mohsen Rezaei warned that Iran could halt oil exports through the Strait of Hormuz and elsewhere in the Persian Gulf if the economic war continues. The persistent geopolitical risk premium therefore supports demand for the US Dollar and helps underpin USD/JPY.

However, the pair’s advance remains limited by uncertainty surrounding the Federal Reserve’s (Fed) policy path. Inflation risks associated with volatile Oil prices keep the possibility of further monetary tightening alive, but markets are becoming less convinced that an immediate rate hike is likely. Concerns about the sustainability of US public finances also limit demand for the Greenback.

Investors now turn their attention to Wednesday’s release of the US Personal Consumption Expenditures (PCE) Price Index, ahead of Fed Chair Kevin Warsh’s speech at the Jackson Hole Symposium. These events could provide fresh clues about the path of US interest rates and determine whether USD/JPY can extend its advance above the 159.00 area.

BoJ tightening path stays in focus as market eyes September move

Analysts at Commerzbank note that the Bank of Japan "remains in focus" as investors reassess the policy outlook. They highlight remarks from former BoJ board member Seiji Adachi, who said the central bank will "probably raise its benchmark rate as early as September, followed by another potential increase in January." Commerzbank adds that his comments "reinforce market expectations of a gradual tightening path."

USD/JPY technical analysis

In the one-hour chart, USD/JPY trades at 159.29. The pair retains a mild bullish bias as it holds above the 100-period simple moving average (SMA) around 158.88 and the 200-period SMA near 159.12, while also trading just over the rising trend-line support now coming in around 159.26. The Relative Strength Index (RSI) near 56 sits in positive territory without being overbought, suggesting steady but not overstretched upside momentum as long as price remains supported by this cluster of moving averages and trend-line demand.

On the topside, initial resistance emerges at the horizontal barrier around 159.50, followed by a higher cap near 159.78, where sellers could again challenge the advance. On the downside, immediate support is seen at the trend-line zone around 159.26, ahead of the 200-period SMA at 159.12 and the 100-period SMA near 158.88, with a deeper floor at the horizontal level of 158.55, where a break would signal a more meaningful loss of bullish control.

(The technical analysis of this story was written with the help of an AI tool. Know more.)