Can the Japanese Yen withstand Japan’s widening Trade Deficit and the BoJ’s cautious stance?

• Slower growth in exports and imports drove Japan’s trade deficit to JPY 536.6 billion in September.
• Expanding supply capacity without fuelling inflation remains the goal as Japan’s Finance Minister Katayama confirmed close cooperation with the BoJ.
• With the October meeting approaching, markets assess Fed Chair Warsh’s neutral position against the latest US inflation figures.

Pressure on the Japanese Yen (JPY) is intensifying following the latest merchandise trade balance report from Japan’s Ministry of Finance. Against this backdrop, USD/JPY is recovering from the previous day’s modest decline, hovering near 158.30 in Wednesday’s Asian session.

September saw a significant widening in Japan’s trade deficit to JPY 536.6 billion, down from August’s JPY 1,111.9 billion. At well above the JPY 181.0 billion deficit anticipated by markets, the shortfall extended the country’s run of monthly trade deficits to five.

Import growth in Japan eased to 18.9% year-on-year (YoY), its weakest pace since May, compared with August’s 28.0% jump and expectations of 19.6%. Export growth also disappointed at 16.7% against a projected 20.1%, slowing to a five-month low. Crude oil imports, however, climbed 51.1% despite the broader moderation in imports. The increase reflects Japan’s continuing efforts to diversify energy supplies amid geopolitical tensions around the Strait of Hormuz.

Close coordination between the government and the Bank of Japan (BoJ) was reaffirmed on Wednesday by Japanese Finance Minister Satsuki Katayama, who said there were no major differences over the inflation outlook or monetary policy. While acknowledging that tax cuts lift demand and prices, she said the government would pursue a proactive, responsible fiscal policy to expand Japan’s supply capacity without pushing inflation higher.

Markets are still assessing the Federal Reserve’s (Fed) policy trajectory after recent comments by Fed Chair Kevin Warsh, even as the latest economic figures showed that CPI inflation in the United States (US) picked up in September. Saying he does not "prejudge" interest rate decisions, Chair Warsh gave no clear indication of whether the central bank would raise rates or leave them unchanged at its October policy meeting.

Technical Analysis: Can USD/JPY Sustain Its Bullish Bias?

Trading at 158.30 on the daily chart, USD/JPY retains a bullish short-term outlook. Spot remains above the nine- and 50-day Exponential Moving Averages (EMAs), lending support to the wider uptrend. At around 54, the 14-day Relative Strength Index (RSI) points to steady momentum without overbought conditions, leaving scope for buyers to extend the rise. Meanwhile, a reading of 127.51 on the FXS Fed Sentiment Index suggests that the policy backdrop remains supportive.

The nine-day EMA at 158.20 offers the first downside support, ahead of the 50-day EMA at 158.08. Together, these levels create a nearby demand zone that supports the bullish structure. Holding above the two averages would keep the technical outlook tilted towards further gains. A daily close below 158.08, however, would indicate fading momentum and leave the pair exposed to a deeper correction.

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