USD/JPY Outlook: Yen strengthens amid impact of Japan's yield curve flattening

Yen Strengthens Despite Market Expectations

Contrary to what many would expect, the Japanese yen is gaining ground even as US Treasury yields rise and recent strong US employment data emerges. The primary forces behind the yen’s upward momentum appear to be changes in Japan’s yield curve and a reduction in fiscal uncertainty, which are now having a greater impact on the USD/JPY exchange rate than US economic indicators.

Leading up to last weekend’s election, concerns about Japan’s fiscal outlook were heightened, especially as political debates focused on making the 8% food sales tax relief permanent. Investors feared that such promises might push Prime Minister Sanae Takaichi toward adopting a more expansionary fiscal policy. In response, Takaichi took steps to reassure the markets and maintain stability.