- The Japanese Yen continues to be undermined by the BoJ rate-hike uncertainty.
- The widening US-Japan yield differential further weighs on the lower-yielding JPY.
- The Fed’s hawkish stance acts as a tailwind for the USD and the USD/JPY pair.
The Japanese Yen (JPY) remains on the back foot against its American counterpart and trades around a six-month low during the Asian session on Wednesday. The uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) is a key factor undermining the JPY. Furthermore, the Federal Reserve’s (Fed) hawkish shift remains supportive of elevated US Treasury bond yields, resulting in the widening of the US-Japan yield differential and weighing on the lower-yielding JPY.
That said, speculations that Japanese authorities might intervene in the market to prop up the domestic currency hold back the JPY bears from placing fresh bets. Apart from this, concerns about US President-elect Donald Trump’s tariff plans, geopolitical risks and the cautious market mood, could help limit losses for the safe-haven JPY. This, along with subdued US Dollar (USD) demand, contributes to capping the USD/JPY pair. Investors also seem reluctant ahead of the US data and FOMC Minutes.
Japanese Yen continues to be undermined by BoJ rate hike uncertainty
- Japan’s Finance Minister Katsunobu Kato was out with some verbal intervention on Tuesday and said that the government will take appropriate action against excessive FX moves, including those driven by speculators.
- The Bank of Japan has kept markets guessing on how soon it could hike interest rates again, which continued to undermine the Japanese Yen and lifted the USD/JPY pair to a near six-month high on Tuesday.
- BoJ Governor Kazuo Ueda said on Monday that the central bank will raise interest rates further if the economy continues to improve, though the timing depends on economic, price and financial developments.
- Some investors are betting on the possibility of a BoJ rate hike at the January 23-24 meeting amid the broadening inflationary pressures in Japan, while others see a stronger chance of a move in March or beyond.
- The yield on the benchmark 10-year Japanese government bond (JGB) rose to its highest level since July 2011, though it failed to provide any respite to the JPY bulls amid the widening US-Japan yield differential.
- The US Treasury yields extended the recent uptrend after data released on Tuesday pointed to a resilient economy, suggesting that the Federal Reserve could cut interest rates fewer times this year than expected.
- The Institute for Supply Management reported that its Non-Manufacturing Purchasing Managers’ Index (PMI) rose to 54.1 in December and the Prices Paid component rose to the highest since September 2023.
- Separately, the Job Openings and Labor Turnover Survey (JOLTS) showed that the number of job openings on the last business day of November stood at 8.09 million, up from the 7.83 million reported in October.
- The data was consistent with a strong pace of economic activity, which, along with US President-elect Donald Trump’s policies, could reignite inflationary pressures and cast doubt on further rate cuts by the Fed.
- Traders now look forward to the US economic docket – featuring the release of the ADP report on private-sector employment and the usual Weekly Initial Jobless Claims data – for short-term opportunities.
- The focus, however, will remain glued to the FOMC meeting Minutes, due later during the US session, which should influence the US Dollar (USD) ahead of the closely-watched US Nonfarm Payrolls report on Friday.
USD/JPY technical setup seems tilted firmly in favor of bullish traders
From a technical perspective, acceptance above the 158.00 round figure, along with positive oscillators on the daily chart, favor bulls for additional gains. Hence, a subsequent strength towards the 159.00 mark, en route to the 159.45 intermediate hurdle and the 160.00 psychological mark, looks like a distinct possibility.
On the flip side, the 157.60 area now seems to protect the immediate downside ahead of the 157.35-157.30 zone and the 157.00 mark. The latter should act as a pivotal point, below which the USD/JPY pair could slide to the 156.25 intermediate support en route to the 156.00 mark. Some follow-through selling might negate the positive bias and pave the way for a deeper corrective decline.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
