The Japanese yen ended today’s session holding on to part of its recent gains, but its movement remained constrained near the lowest levels seen in nearly 18 months, as markets stayed cautious about the possibility of official intervention. This caution has intensified amid escalating political rhetoric ahead of an election that could pave the way for more expansionary fiscal policies.
During early Asian trading hours, the yen hovered around 158.55 per dollar, benefiting from a modest rebound of about 0.4% in the previous session following renewed verbal warnings from Finance Minister Satsuki Katayama. However, this rebound failed to alter the broader picture, with the currency still close to the 159.45 level its weakest point in a year and a half.
Since Prime Minister Sanae Takaichi took office in October, the yen has lost nearly 5% of its value, as investor concerns mounted over potential spending policies that could place additional strain on public finances. The government plans to dissolve the lower house of parliament next week and call for snap elections, a move that has reignited selling pressure on both the yen and Japanese government bonds amid growing speculation over the economic fallout.
The prospect of early elections has brought debt sustainability concerns back into focus, pushing the yen toward levels historically associated with intervention risks. At the same time, the Bank of Japan faces a delicate balancing act between supporting the currency and avoiding excessive tightening that could undermine economic growth.
In this context, FX strategists at OCBC noted that verbal warnings have temporarily slowed the yen’s decline, but markets are likely to test whether authorities are prepared to back rhetoric with concrete action. They added that a sustained recovery in the yen would require a more hawkish stance from the Bank of Japan, alongside greater clarity on Japan’s fiscal and political outlook.
Elsewhere, most Asian currencies traded in relatively tight ranges, as U.S. inflation data came in broadly in line with expectations, leaving Federal Reserve rate cut assumptions largely unchanged. At the same time, investors continued to monitor political developments in Japan and assess newly released trade data from China.
China’s trade figures painted a more balanced picture, with a strong trade surplus supported by exports that exceeded expectations and steady growth in imports signaling resilient external demand and gradual improvement in domestic consumption. For the full year 2025, China’s trade surplus reached a record level, as weaker shipments to the United States were largely offset by robust demand from other regions. As a result, the Chinese yuan remained relatively stable in both onshore and offshore markets, indicating an absence of immediate pressure on the currency despite global uncertainties.
On the other hand, the U.S. dollar experienced a brief setback earlier in the week following controversy surrounding comments by Federal Reserve Chair Jerome Powell regarding his subpoena, which revived concerns over central bank independence. Nevertheless, the dollar managed to regain its footing as markets absorbed the escalation, with the dollar index stabilizing near 99.13, little changed on a weekly basis.
The dollar index also traded around 98.91, showing limited movement after a slightly weaker start to the week. This resilience came despite softer consumer inflation data, as core CPI rose by 0.2% in December, bringing the annual rate to 2.6%, marginally below expectations. Importantly, rate pricing saw no major adjustments, reinforcing market conviction that the Fed’s policy path is unlikely to shift abruptly.
Sentiment toward the dollar was further supported by coordinated backing for the Fed Chair from several global central bank officials, easing selling pressure and keeping the greenback steady ahead of upcoming producer price and retail sales data.
Attention has since turned to U.S. economic indicators, where November data showed a modest rise in producer prices driven by higher fuel costs, alongside stronger than expected retail sales. Together, these figures have reinforced expectations that the Federal Reserve will hold rates steady in January, while markets continue to price in two rate cuts later in the year albeit at a later stage.
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