The Japanese Yen (JPY) trades modestly lower during the Asian session on Tuesday, snapping a two-day winning streak and pulling back from its strongest level since November 2025 against the US Dollar. The pullback comes as investors grow increasingly uneasy about Japan’s fiscal position following Prime Minister Sanae Takaichi’s expansive spending and proposed tax-cut measures. A generally positive risk mood further weighs on the safe-haven JPY, while domestic political uncertainty persists ahead of the snap election scheduled for February 8.
That said, downside momentum in the Yen appears limited. Speculation that Japanese authorities could step in to curb excessive currency weakness continues to deter aggressive bearish positioning, especially as the Bank of Japan (BoJ) maintains a hawkish policy bias. Meanwhile, the US Dollar remains pinned near a four-month low amid expectations that the Federal Reserve will deliver two additional rate cuts this year. This divergence keeps a lid on any meaningful USD/JPY recovery, with traders awaiting direction from the highly anticipated two-day FOMC meeting that begins later today.
Japanese Yen slips as fiscal concerns and political risks offset intervention fears
Japan’s fragile public finances have returned to the spotlight after Prime Minister Sanae Takaichi pledged to suspend sales tax on food items as part of her campaign strategy ahead of the February 8 lower-house election.
Worries over the country’s fiscal outlook have been a key driver behind the recent rise in long-dated Japanese government bond (JGB) yields, which threatens to increase debt-servicing costs and, in turn, limits further appreciation in the Yen.
On the data front, figures released earlier Tuesday showed a moderation in wholesale inflation. Japan’s Producer Price Index (PPI) rose 2.4% year-on-year in December, easing from the 2.7% increase recorded in November. Additionally, the Corporate Service Price Index advanced 2.6% YoY, slightly below the previous month’s 2.7% gain.
The data did little to challenge the Bank of Japan’s tightening outlook and had a limited impact on the JPY. Notably, the BoJ last Friday left short-term interest rates unchanged while upgrading its economic and inflation projections, reaffirming its readiness to continue gradually raising borrowing costs.
This policy stance contrasts sharply with the increasingly dovish outlook for the US Federal Reserve, keeping the US Dollar under pressure near multi-month lows and offering underlying support to the Yen amid persistent intervention risks. On Sunday, Prime Minister Takaichi reiterated that authorities stand ready to act against speculative and disorderly currency moves, following rate-check operations by Japan’s Ministry of Finance and the New York Fed late last week.
Even so, traders appear hesitant to take strong directional positions ahead of the outcome of the two-day FOMC meeting, which is expected to be the key driver of USD and USD/JPY price action in the near term.
