Japan’s Widening Trade Deficit and BoJ Caution Weigh on Japanese Yen

• JPY 536.6 billion was Japan’s trade deficit in September. Slower growth in exports and imports drove the shortfall.
• Close coordination with the BoJ aims to expand supply capacity without fuelling inflation, Japan’s Finance Minister Katayama confirmed.
• Ahead of the October meeting, markets assess US inflation figures against Fed Chair Warsh’s neutral policy stance.

USD/JPY trades near 158.30. The pair is advancing in Wednesday’s Asian session after modest losses the previous day. Pressure on the Japanese Yen (JPY) is building following the latest merchandise trade balance report from Japan’s Ministry of Finance.

September’s trade deficit in Japan widened sharply to JPY 536.6 billion, down from JPY 1,111.9 billion in August. Against market forecasts for a JPY 181.0 billion deficit, the shortfall was much larger than expected. It also extended the country’s run of monthly trade deficits to five.

At 18.9% year-on-year (YoY), Japan’s import growth slowed from August’s 28.0% surge. The reading fell short of the 19.6% forecast and was the weakest since May. Export growth of 16.7% also undershot the 20.1% estimate, reaching its slowest rate in five months. Crude oil imports, however, climbed 51.1% despite the broader import slowdown. The increase reflected 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) remains in place, Japanese Finance Minister Satsuki Katayama said on Wednesday. She stressed that their views on the inflation outlook and monetary policy show no major divergence. Tax cuts stimulate demand and lift prices, she noted. The government would nevertheless ensure that proactive, responsible fiscal policy expands Japan’s supply capacity without adding to inflation.

September CPI inflation accelerated in the United States (US), according to recent economic releases. Markets are nonetheless reassessing the Federal Reserve’s (Fed) next steps after comments from Fed Chair Kevin Warsh. On interest rate decisions, Warsh said he does not "prejudge" the outcome. His remarks gave no clear indication of whether the central bank plans to raise rates or leave them unchanged at its October policy meeting.

Technical Outlook:

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

The nine-day EMA at 158.20 provides the first downside support, ahead of the 50-day EMA at 158.08. Together, these averages create a nearby demand zone supporting the bullish structure. Further gains would remain technically favoured while USD/JPY stays above both averages. A daily close below 158.08, however, would indicate fading momentum and leave the pair vulnerable to a deeper correction.

(An AI tool assisted in preparing this story’s technical analysis. Learn more.)