The Japanese yen continued its recent crash on Thursday as its run as one of the worst-performing currencies accelerated. The USD/JPY exchange rate jumped to a high of 158, up by over 12% from its lowest level in April this year. It has jumped to its highest level since January last year.

Japanese yen crashes amid stimulus hopes

The main reason why the Japanese yen crash continued is that Sanae Takaichi is considering a large stimulus package worth about $112 billion to supercharge an economy that is showing signs of slowing down. A report released earlier this week showed that the economy contracted in the last quarter.

The stimulus announcement means that the supply of the Japanese yen will continue rising in the next few months, which will devalue the currency. It also means that Japan’s public debt will continue rising, a notable thing since the country has a debt-to-GDP ratio of 230%.

The report also explains why Japan’s bond market is struggling, with the yield of the 10-year rising to 1.85%, its highest level since June 2008. It has jumped sharply from negative 0.28% in 2018. Japan’s five-year yield jumped to 1.319%, its highest level since June 2008. 

The ongoing Japanese yen crash has implications for the economy. Top exporters like Toyota and Honda will benefit as the cost of their vehicles drop to consumers. However, the risk is that it may attract ire from Donald Trump who has always accused Japan of currency manipulation to boost its exports to the United States.

Meanwhile, the Japanese yen continued its crash after a meeting of Bank of Japan officials ended without a mention of the weakening currency. It is widely expected that the BoJ has either started or is considering announcing measures to support the currency. In a statement, Minoru Kihara, the chief cabinet secretary said:

“We are concerned about the recent one-way and sudden movements in the foreign exchange market. It’s important for exchange rates to remain stable, reflecting fundamentals.”

BoJ may hike interest rates in December 

The ongoing Japanese yen crash means that the Bank of Japan will likely consider hiking interest rates in the next meeting in December. This view was confirmed by Junko Koeda, a BoJ board member who said:

“Given that real interest rates are currently at significantly low levels, I believe that the bank needs to proceed with interest rate normalization.”

An interest rate hike would come at a time when the economy is slowing and inflation has dropped steadily in the past few months. A weaker yen may push inflation higher by making the cost of key raw materials and energy rise.

USD/JPY Technical Analysis 

USD/JPY 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 139.86 in April to nearly 158 today.

It has formed a golden cross pattern as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other. Also, the Relative Strength Index (RSI) has moved to 72, a sign that the upward momentum is continuing.

The Average Directional Index has moved to 22 and is pointing upwards, a sign that the uptrend is gaining momentum. 

Therefore, the most likely scenario is where the pair continues rising, with the next key resistance level to watch being at 158, its highest swing on January 10. A move above that level will point to more gains, potentially to the psychological level at 160.

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