Yen extends recovery on US government shutdown risks

The Japanese yen rose in Asian markets on Monday against a basket of major and minor currencies, extending its rebound for a second straight day from an eight-week low against the US dollar, supported by buying activity at lower levels and the dollar’s defensive stance amid risks of a US government shutdown.

A split within the Bank of Japan’s board has increased pressure on dovish Governor Kazuo Ueda to move faster on normalizing monetary policy, boosting the likelihood of a Japanese rate hike in October.

Price Overview

• USD/JPY fell 0.4% to ¥148.88, from today’s opening at ¥149.47, after touching a high of ¥149.51.

• The yen ended Friday up 0.2% against the dollar, its first gain in three sessions, after earlier hitting an eight-week low at ¥149.96.

• The yen lost more than 1% against the dollar last week, marking a fifth straight weekly decline and its biggest weekly loss since early July, weighed down by political uncertainty in the world’s fourth-largest economy.

US Dollar

The dollar index fell 0.25% on Monday, extending losses for a second session and pulling back from a three-week high of 98.61 points, reflecting continued weakness of the US currency against major peers.

Beyond profit-taking, the dollar’s retreat is tied to the looming risk of a US government shutdown if Congress fails to pass a funding bill before the fiscal year ends on Tuesday. Without approval, parts of the government will close on Wednesday, the first day of fiscal year 2026.

Japanese Interest Rates

• The Bank of Japan kept interest rates unchanged at 0.5% earlier this month, in line with market expectations.

• However, dissenting calls from two board members for a 25-basis-point hike surprised markets and were seen as a signal that the BoJ is less concerned about economic headwinds than previously thought.

• The dissenters aimed to push Governor Kazuo Ueda to accelerate the pace of rate increases, as tightening is seen as inevitable sooner or later.

• Markets currently estimate about a 50% chance of a 25-basis-point rate hike in October.

• A Reuters poll showed a majority of economists expect another 25-basis-point increase in Japanese interest rates by year-end.

• To reprice those expectations, investors are awaiting further data on inflation, unemployment, and wages in Japan.