The Japanese yen has resumed its decline against the U.S. dollar after Sanai Takaichi, a member of the prime minister's key advisory group, stated that the central bank is unlikely to raise the key interest rate before March of next year. According to her, the authorities need to make sure that the large additional spending they plan to undertake truly stimulates domestic demand.

"Fiscal policy is the starting point," said Goushi Kataoka, a member of Takaichi's economic growth strategy group. He estimated that an additional budget of about 20 trillion yen (129 billion dollars) will be needed in this fiscal year — significantly more than the 13.9-trillion-yen package compiled a year earlier by Takaichi's predecessor.

Traders interpreted this as a signal that the Bank of Japan will continue its loose monetary policy, while the U.S. Federal Reserve, by contrast, is signaling the possibility of a pause in its cycle of rate cuts in order to fight inflation. This divergence in the two countries' monetary policies is putting strong pressure on the yen.

Economists note that the government's concerns about weak domestic demand are well-founded. Despite attempts to stimulate the economy, Japanese consumers remain cautious in their spending due to stagnant wages and a rising cost of living. Under these conditions, further rate hikes could smother the fragile economic recovery. Nevertheless, prolonged yen weakness also has negative consequences. It increases the cost of imports, placing additional pressure on inflation and reducing households' purchasing power. Moreover, a weak yen may deter foreign investors who are wary of currency risks.

If the economic stimulus package expected to be announced later this week is effectively implemented, domestic demand could grow as early as the first quarter of next year. "If everything unfolds this way, the Bank of Japan may have an opportunity to raise rates as early as March of next year," said Kataoka, who had been a strong advocate of fiscal and monetary stimulus during his previous tenure as a member of the Bank of Japan's board.

Kataoka's view points to the risk of a delay in the Bank of Japan's next rate hike, even though most economists are forecasting a shift as early as January — especially given the yen's recent weakening.

Kataoka also noted that Japan's economy is in a difficult position, as real GDP has contracted for the first time in six quarters. However, the core consumer price index, excluding food and energy, remains below 2%, and in his view, from a logical standpoint, further rate hikes would be unreasonable.

It is worth noting that the Bank of Japan will make its monetary policy decision on December 19, and Kataoka said he does not expect Takaichi, as prime minister, to exert any overt pressure on the central bank.

As for the current USD/JPY technical picture, buyers need to reclaim the nearest resistance at 155.55. This would allow them to target 155.87, above which a breakout will be quite difficult. The furthest target would be the 156.23 level. In the event of a decline, bears will attempt to take control of 155.15. If they manage to do so, breaking this range would deal a serious blow to the bulls' positions and push USD/JPY down toward the 154.77 low, with the prospect of a move to 154.31.