Potential Yen Intervention and China Stimulus

Last week, Japan approved a ¥21.3 trillion ($135.4 billion) stimulus package to support the economy and offset higher prices, while China is reportedly considering another round of stimulus for its beleaguered real estate market.

The Latest Developments

• Japan announces massive stimulus spending to offset the effects of tariffs and lower consumer prices.
• Speculation of a potential intervention to support the yen this week has increased as USDJPY is poised to hit its highest level in a year.
• The Chinese government is reportedly considering new stimulus measures to support its beleaguered property sector amid a flight of foreign investors.

Spending to Lower Prices?

The spending package approved by Japan's parliament last week is larger than any stimulus programme outside of covid and marks a signature start to Sanae Takaichi's premiership. Analysts have compared her fiscal expansion policies to those of former PM Shinzo Abe, but the measures so far suggest she intends to redouble stimulus. This could pose a challenge for the island nation, as its debt almost triples its GDP and puts pressure on the BOJ. Given the high debt burden, investors have pushed JGB yields higher, increasing the cost of servicing the debt. This also puts additional strain on Japanese financial institutions. Although inflation remains above target, the rising yields could keep the BOJ from raising rates further.

In promoting the stimulus, Japanese officials have also claimed they intend to curb higher consumer prices and offset the impact of US tariffs. If successful, this would further reduce the need for the BOJ to raise rates. While this is happening, the yen has weakened substantially, and USDJPY is close to crossing the 158 threshold that would mark new highs for the year. Japanese officials last week talked about concerns about the rapidly accelerating weakness in their currency, with a relatively rare verbal intervention by BOJ Governor Kazuo Ueda. This has fuelled speculation that the government might intervene this week to support the currency, considering holidays in Japan and the US would imply less liquidity. Typically, the BOJ intervenes during periods of low liquidity to maximise the impact of its stimulus. The Ministry of Finance has recently emphasised concern about the rate at which the yen is weakening rather than a specific level. The timing could be crucial, as Japan and its leading trade partner, China, are in a diplomatic spat over Taiwan that has led to trade restrictions between the countries.

China Considering Housing Stimulus

Reports also circulated late last week that Chinese officials were considering a new package to stimulate its housing sector, which has been facing difficulty for years. While investors have reduced exposure, it still represents the largest share of the country's wealth and has significant implications for exporters of raw materials to China, such as Australia. The value of new home sales plummeted by more than 40% in October, as the country faces economic turbulence in the final quarter of the year. The Shanghai Composite index fell 2.5% on Friday, the worst performance since Trump's tariff announcements back in April. Over the weekend, it was reported that FDI in China fell 10% to the worst level since the early 1990s.

Among the potential measures reportedly being considered to boost the Chinese housing market are mortgage subsidies and lower transaction costs for homes. Rating agencies have warned that Chinese banks are at risk of credit defaults amid mounting bad loans in the real estate sector. Calls for new stimulus measures to support the property sector have increased since October, when mortgage rates fell to the lowest level on record, but have not yet inspired a surge in buying. Substantial measures to support this sector of the economy could help regain confidence among exporters of raw materials, including iron ore from Australia.

AUDJPY Eyes 105 Amid Probable Double-Top Breakout

While USDJPY trades slightly under its 2025 peak, AUDJPY has tested the 102.50 high reached in September 2024 and already formed a short-term double top. Following a potential inverse head-and-shoulders (iH&S) pattern with a rather extended head, a breakout might open the door to the 105.00 handle when projected by the neckline breakout near 95.00. However, a wedge pattern coupled with RSI divergence introduces downside risk, especially when coupled with Japanese intervention. If the double-top resistance holds firm, losing triple-digit levels would expose 97.50 in case of 99.00 giving way to bears.

Source: SpreadEx | AUDJPY Daily Chart