The Japanese Yen continues to strengthen against a weaker US Dollar, reaching a two-week high during the European session. The anticipation that the Bank of Japan might raise interest rates in October, alongside geopolitical tensions and a US government shutdown, favours the Yen as a safe haven.
US And Japanese Economic Data Overview
Expectations that the Bank of Japan might adopt a more hawkish stance contrast with predictions of the US Federal Reserve cutting borrowing costs twice this year. This has brought the USD/JPY pair to a one-week low near the 147.00 mark. Upcoming US economic data, such as the ADP report and ISM Manufacturing PMI, may provide further direction.
Japan recorded a Manufacturing PMI of 48.5 in September, the fastest contraction in six months. However, the Tankan business survey shows slight improvements in Japanese manufacturer sentiment. A potential 25-basis-point rate hike by the BoJ in October supports the Yen.
A partial US government shutdown has begun, with potential negative effects on the economy. The FedWatch Tool indicates a higher likelihood of Fed rate cuts. US job openings were reported at 7.22 million for August. If government closures continue, key economic data releases like the Nonfarm Payrolls report could be delayed.
The divergence between central banks is the most important factor for us right now. We see the Bank of Japan on a clear path to raise interest rates, with overnight index swaps now pricing in an 85% chance of a hike at the October 28th meeting. This policy tightening sharply contrasts with the Federal Reserve, where markets are anticipating cuts.
US Government Shutdown Impact
On the US side, the ongoing government shutdown is fueling expectations of a more dovish Fed. Looking back, the 2018-2019 shutdown lasted 35 days and shaved about 0.2% off quarterly GDP, a precedent that makes the Fed nervous. The CME FedWatch tool reflects this sentiment, showing a 70% probability of a rate cut this month and over a 90% chance by the December meeting.
This policy split is directly narrowing the US-Japan interest rate differential, which is the primary driver for USD/JPY. We saw the reverse of this play out during the 2022-2023 period when a widening differential sent the pair soaring above 150. Now, with that spread compressing, we should expect continued downward pressure on the currency pair.
Today’s ADP employment report is a key focus, with consensus at a meager 50,000 jobs, far below the average of 180,000 we saw over the first half of 2025. A number at or below this estimate would reinforce the narrative of a slowing US economy and likely push USD/JPY below the 147.00 level. We should be considering positions that benefit from this, such as buying puts on USD/JPY or establishing short futures contracts.
From a technical standpoint, we are watching the 147.00 mark closely. A sustained break below this level would confirm the bearish momentum and open the door for further declines. Conversely, we should use the 200-day moving average, currently around 148.40, as a key level to monitor for any unexpected reversal in sentiment.
