Yen Holds Range as Tokyo Pushes Stimulus, BOJ Uncertain

Key Moments

USD/JPY traded near 157.90 in Asian hours on Tuesday after modest gains in the prior session, with the pair locked in a tight range.
Prime Minister Sanae Takaichi advanced expansionary measures, including a cut to the consumption tax on food, while pledging no additional bond issuance.
Bank of Japan commentary kept the door open for another rate hike this year, as inflation concerns persist above the 2% target and policy timing remains uncertain.

Fiscal Support in Japan Calms Market Concerns

USD/JPY showed limited movement during Asian trading on Tuesday, hovering around 157.90 after recording only small gains in the previous session. The pair has settled into a constrained trading band as investors react to recent Japanese fiscal developments.

Prime Minister Sanae Takaichi has been pressing ahead with expansionary economic policies despite ongoing worries about the softness of the Yen and the level of public debt. In a parliamentary speech, Takaichi committed to reducing the consumption tax on food items, while also emphasizing that the government plans to obtain the required financing without resorting to fresh bond issuance, a move intended to reassure financial markets about fiscal discipline.

BOJ Rate Path Clouded by Inflation Risks

Uncertainty over the Bank of Japan’s next steps in monetary policy continues to weigh on sentiment. A summary of views from the central bank’s September meeting pointed to mounting concern that inflation could run above the 2% objective, leaving the possibility of another interest rate increase within the current year very much alive.

Even so, with policy meetings scheduled for October and December, the Bank of Japan offered little guidance on when any potential rate move might occur. This lack of specificity has kept investors guessing on the pace and timing of any further normalization.

Geopolitical Tensions Support Safe-Haven Dollar Demand

Looking ahead, the US Dollar may find additional support against the Yen as safe-haven flows build amid rising geopolitical risk. Citing Xinhua News Agency, the report noted that Yemen’s Houthi group claimed responsibility for coordinated drone and missile attacks on Saudi Arabian military sites, an oil facility, and key airports.

Houthi spokesman Yahya Saree said a successful strike on King Khalid International Airport in Riyadh disrupted local air traffic, introducing new turbulence into global markets and potentially reinforcing demand for the Greenback as a perceived refuge in times of stress.

HSBC Sees Profit-Driven Forces Behind US Inflation

Strategists at HSBC focused on the composition of US inflation, challenging the narrative that it is primarily a function of “surging oil and computing costs, as well as the lingering impact of tariffs.” They examined the gross value-added deflator, described as a gauge that tracks “inflation generated by profits, wages, and non-labour related costs.”

According to their assessment, this framework indicates that the recent pickup in headline inflation “appears to have been driven mainly by stronger profit growth,” rather than solely by higher input costs.