- The Japanese Yen is weighed down by doubts over the likely timing of the next BoJ rate hike.
- The recent widening of the US-Japan yield differential also undermined the lower-yielding JPY.
- The USD holds steady near a two-year top and supports USD/JPY ahead of the US NFP report.
The Japanese Yen (JPY) remains on the back foot against its American counterpart and hangs near a multi-month low during the Asian session on Friday. A fall in real household spending in Japan for the fourth month in November pointed to economic fragility and gave the Bank of Japan (BoJ) another reason to be cautious about raising interest rate hikes further. This, in turn, is seen as a key factor that continues to undermine the JPY.
Meanwhile, the Federal Reserve’s (Fed) hawkish signal that it would slow the pace of rate cut in 2025 remains supportive of elevated US Treasury bond yields. This further contributes to the lower-yielding JPY’s relative underperformance, which, along with a bullish US Dollar (USD), acts as a tailwind for the USD/JPY pair. Traders, however, seem reluctant and opt to wait for the release of the US Nonfarm Payrolls (NFP) report later today.
Japanese Yen continues to be undermined by BoJ rate hike uncertainty
- Japan’s Economy Minister Ryosei Akazawa said this Friday that Japan’s economy is at a ‘critical stage’ in eradicating the public’s deflationary mindset and shifting to a phase where growth is spearheaded by higher wages and investment.
- Government data released earlier today showed that inflation-adjusted household spending in Japan – a key indicator of private consumption – fell for the fourth month, by 0.4% in November from a year earlier amid stubbornly high prices.
- This comes on top of a drop in real wages for the fourth consecutive month in November and points to broadening inflationary pressure, which keeps the door open for another interest rate hike by the Bank of Japan in January or March.
- Some investors, however, are betting that the BoJ may wait until April to seek confirmation that strong wage momentum will carry over into the spring negotiations between companies and labor unions before pulling the trigger.
- The yield on the benchmark 10-year US government bond remains well within striking distance of its highest levels since the middle of last year touched last week amid the Federal Reserve’s hawkish shift after the December meeting.
- Boston Fed President Susan Collins said on Thursday that the economy is on gradual, uneven trajectory back towards the 2% inflation target and the current outlook calls for a gradual and a patient approach to interest rate cuts.
- Philadelphia Fed President Patrick Harker noted that it is taking longer to get back to 2% inflation than expected. He added that the US central bank is still expected to continue to cut rates but explained that the path will depend on data.
- Kansas Fed President Jeffrey Schmid noted that inflation is moving toward target and growth is showing momentum, while the jobs market is weaker but still healthy. Any further interest rate cuts should be gradual and data-driven.
- Fed Board of Governors member Michelle Bowman said that the current stance of policy may not be as restrictive as others may see it and pent-up demand following the election could pose inflationary risks.
- The US Dollar stands tall near a two-year peak and assists the USD/JPY pair to hold steady above the 158.00 mark as traders keenly await the release of the US jobs data – popularly known as the Nonfarm Payrolls report later today.
USD/JPY technical setup supports prospects for a move towards 159.00
From a technical perspective, the near-term bias remains tilted in favor of bullish traders, though the recent range-bound price action makes it prudent to wait for some meaningful buying before positioning for any further gains. The 158.55 area, or the multi-month top touched on Wednesday, could act as an immediate hurdle, above which the USD/JPY pair could aim to reclaim the 159.00 mark. The momentum could extend further towards the 159.45 intermediate hurdle en route to the 160.00 psychological mark.
On the flip side, the overnight swing low, around the 157.60-157.55 region, might continue to protect the immediate downside. Some follow-through selling, however, could make the USD/JPY pair vulnerable to accelerate the slide towards the 157.00 mark en route to the next relevant support near the 156.75 region and the weekly low, around the 156.25-156.20 area. This is followed by the 156.00 mark, which if broken decisively might shift the near-term bias in favor of bearish traders and pave the way for deeper losses.
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.
Read the full article here