During Wednesday's Asian session, the US dollar traded around 158.10 against the Japanese yen, continuing the oscillating upward pattern seen since last week.
The driving force behind this exchange rate move came primarily from structural weakness on the yen side: a persistently widening trade deficit and rising energy import costs undermined the yen's current account support, while the US-Japan interest rate differential remained elevated under the Federal Reserve's hawkish narrative. The combination of these two factors gave the currency pair a tendency to rise easily while falling with difficulty.
Looking at trade data, Japan's Ministry of Finance reported that the September merchandise trade balance showed a deficit of 536.6 billion yen. Although this figure narrowed significantly from August's 1,111.9 billion yen, it substantially exceeded the market forecast of 181 billion yen and marked the fifth consecutive month of trade deficit.
Breaking down the components, imports rose 18.9% year-on-year, slower than August's 28.0% pace and below the expected 19.6%, marking the slowest growth since May. Exports grew 16.7%, falling short of the anticipated 20.1% and also recording the slowest expansion in five months. Notably, despite the overall slowdown in import growth, crude oil imports surged 51.1% year-on-year.
This directly reflects the reality that Japan has increased purchasing efforts to safeguard energy security amid escalating geopolitical tensions in the Middle East 鈥?at least 18 incidents of commercial vessel attacks occurred in the Strait of Hormuz over the past two weeks, pushing Brent crude to a multi-month high of $111.2. The rigid rise in energy costs not only eroded the terms of trade but also compressed the Bank of Japan's policy space through imported inflation channels. This is the core reason why the yen struggled to attract substantive buying even as the dollar broadly retreated.
On the policy front, Japanese Finance Minister Kato Katsunobu stated on Wednesday that the government is maintaining close coordination with the Bank of Japan, and the two sides do not have major disagreements on inflation outlook and monetary policy. She also noted that while tax cuts would boost demand and push prices higher, the government will ensure the implementation of proactive and responsible fiscal policy, expanding supply capacity while avoiding accelerating inflation. The key implication of this statement is that fiscal and monetary authorities have not shown obvious policy rifts due to rising inflation, and the possibility of supporting the yen through "verbal intervention" or fiscal tightening commitments in the short term is relatively low.
Combined with earlier remarks by BOJ Governor Ueda Kazuo that underlying inflation is "very close" to the 2% target, market expectations for further monetary tightening still exist, but such expectations remain more on a gradual path, lacking catalysts sufficient to rapidly narrow the US-Japan rate differential.
On the US side, the logic is relatively clear. Last week's September CPI rose 3.7% year-on-year, with inflation stickiness persisting. Fed Chairman Warsh explicitly stated he would not "pre-judge" rate decisions and gave no clear signal on whether the October meeting would bring a hike or a hold. According to the CME FedWatch tool, traders currently price the probability of another 25 basis point hike at the October 27-28 meeting at approximately 16.1%, while pricing for a December hike already exceeds 90%. Most policymakers also expect at least one more hike this year.
This combination of "clear direction, delayed timing" allows the dollar's rate advantage to persist while avoiding a risk sentiment reversal triggered by excessive hawkishness. For USD/JPY, this is a relatively favorable macro environment: the rate differential provides bottom support, while stable risk appetite suppresses yen safe-haven buying. Warsh's recent remarks scored 5.6/10 on the FXS Speechtracker, slightly below the historical average of 6.1/10, indicating his communication intensity was milder than usual, though the overall tone remained constructive. He described himself as "too deeply scarred by the global financial crisis," highlighting that while emphasizing structural growth, investment surges, and the boost from artificial intelligence to data and policy confidence, he maintains vigilance over financial stability.
The FXS Fed Sentiment Index remains at a high level of 127.51, well above the neutral benchmark, indicating the overall policy narrative remains firmly in hawkish territory. This means that although the remarks lacked incremental signals, the dollar's policy support has not loosened. As long as the index stays above 127 and the year-end tightening path is not disproven, USD/JPY pullbacks are closer to technical corrections rather than trend reversals.
From the perspective of global market linkages, the current USD/JPY movement is essentially the transmission result of the "energy costs鈥攊nflation鈥攊nterest rate differential" chain. High oil prices on one hand suppress the BOJ's easing space through imported inflation, and on the other hand reinforce the Fed's hawkish stance by pushing up US inflation readings. This dual effect naturally favors USD/JPY upside.
However, investors should still note that if the Middle East situation deteriorates sharply and triggers a sudden drop in global risk appetite, the yen's safe-haven attributes could be reactivated, exerting reverse pressure on the exchange rate. Additionally, French political turmoil (with the France-Germany spread widening to about 150 basis points) and European political uncertainty could also indirectly disturb the short-term rhythm of the exchange rate through the dollar index channel.
On the daily chart, USD/JPY is trading above the 9-day exponential moving average and the 50-day EMA, with short-term moving averages in a bullish alignment, supporting the overall uptrend. The RSI is near 54, above the 50 neutral line and not yet in overbought territory, indicating moderate upward momentum release with room for buyers to push further. The elevated reading of the Fed Sentiment Index also provides a supportive backdrop on the policy front. On the downside, support is seen at the 9-day EMA around 158.20, the 50-day EMA around 158.08, and 157.50. These two moving averages together form a recent demand zone, and as long as the exchange rate holds above this area, the technical bias favors further upside. If the daily candle closes below 158.08, it would signal momentum loss and potentially open the door to a deeper pullback. On the upside, resistance is seen at 158.80, 159.50, and the 160.00 round number. The 160.00 level is both a psychological threshold and a previous dense trading area, and only a valid break above it would confirm the opening of mid-term upside space.
On the 4-hour chart, the exchange rate is consolidating narrowly between 158.10 and 158.60, with short-term moving averages converging and the MACD histogram near the zero line, indicating momentum turning neutral. If a pullback to 158.10-158.20 finds support, there may still be opportunities for another push toward 158.60-158.80 in the short term. If 158.00 is breached with volume, the rate may seek support at 157.50 or even 157.00. An upward breakout would require coordination from BOJ statements or US data.
Editor's Summary
The core logic for USD/JPY in the short term lies in Japan's trade deficit and rising energy costs weakening the yen, combined with the Fed's hawkish narrative maintaining the US-Japan rate advantage. This dual-driven dynamic gives the bullish bias of the exchange rate a certain inertia. Going forward, three variables need close attention: first, the situation in the Strait of Hormuz and crude oil price trends, which directly determine the pressure on Japan's imported inflation and terms of trade; second, coordinated statements from the BOJ and the Ministry of Finance 鈥?if Ueda Kazuo or Kato Katsunobu signals further tightening or intervention, the yen could rebound rapidly; third, final confirmation of the Fed's year-end policy path, which remains the decisive factor for the dollar's medium-term direction. In the medium term, as long as 158.08 is not effectively breached to the downside, the exchange rate is more likely to maintain a range-bound, slightly bullish pattern. Confirmation of a trending direction still requires the BOJ's policy stance to be finalized and the Fed's year-end rate hike path to become clear.
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