Japan’s widening trade deficit and cautious BoJ signals weigh on Japanese Yen

• A JPY 536.6 billion trade deficit was recorded in Japan in September as export and import growth slowed.
• Close coordination with the BoJ remains in place, Japan’s Finance Minister Katayama confirmed, with the aim of expanding supply capacity without fuelling inflation.
• Ahead of the October meeting, investors assess US inflation figures and Fed Chair Warsh's neutral position.

Japan's latest merchandise Trade Balance report from the Ministry of Finance has added to the pressures facing the Japanese Yen (JPY). After a modest decline the previous day, USD/JPY is advancing, trading near 158.30 in Wednesday's Asian session.

At JPY 536.6 billion in September, Japan’s trade deficit widened considerably, down from August’s JPY 1,111.9 billion. The deficit was substantially larger than the JPY 181.0 billion markets had forecast, leaving the country with a trade shortfall for a fifth successive month.

Import growth in Japan eased to 18.9% year-on-year (YoY), compared with a 28.0% increase in August and expectations of 19.6%. This was the weakest pace since May. Exports, meanwhile, increased by 16.7%, below the 20.1% forecast and their slowest growth in five months. Crude oil imports nevertheless surged 51.1%, despite the broader slowdown in imports, reflecting 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) was reaffirmed on Wednesday by Japanese Finance Minister Satsuki Katayama, who stressed that there was no substantial difference in their views on the inflation outlook or monetary policy. Although tax cuts stimulate demand and push prices higher, she said the government would pursue a proactive, responsible fiscal policy to increase Japan's supply capacity without fuelling inflation.

September brought an acceleration in US CPI inflation, according to the latest economic figures from the United States (US). Investors are nonetheless still assessing the Federal Reserve's (Fed) policy course after recent comments by Fed Chair Kevin Warsh. Saying that he does not "prejudge" interest rate decisions, Chair Warsh gave no firm indication of whether the central bank plans to raise rates or leave them unchanged at its forthcoming October policy meeting.

Technical Outlook Remains Bullish:

With USD/JPY at 158.30 on the daily chart, the short-term outlook remains bullish. Spot is holding above the nine- and 50-day Exponential Moving Averages (EMAs), sustaining the broader upward trend. At around 54, the 14-day Relative Strength Index (RSI) points to steady momentum without overbought conditions, leaving scope for buyers to extend gains. A reading of 127.51 on the FXS Fed Sentiment Index also suggests that the policy backdrop 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 area supporting the bullish structure. Further gains would remain technically favoured while USD/JPY stays above both averages; a daily close beneath 158.08, however, would indicate fading momentum and leave the pair vulnerable to a deeper correction.

(The technical analysis of this story was written with the help of an AI tool. Know more.)