- The Japanese Yen struggles to lure buyers amid wavering BoJ rate hike expectations.
- The risk-on mood and the wider US-Japan yield differential also undermine the JPY.
- Subdued USD demand acts as a headwind for USD/JPY ahead of the US CPI report.
The Japanese Yen (JPY) consolidates during the Asian session on Wednesday and remains close to a multi-month low touched against its American counterpart earlier this week amid doubts over the Bank of Japan’s (BoJ) rate hike plans. The broadening inflationary pressures in Japan keep the door open for a BoJ rate hike in January or March. Moreover, BoJ Deputy Governor, Ryozo Himino, signaled on Tuesday that a rate hike remains a tangible possibility at the upcoming meeting. However, Himino did not offer direct clues on the possibility of a January rate hike. Moreover, some investors are betting that the BoJ may wait until the spring negotiations before pulling the trigger.
Meanwhile, the Federal Reserve’s (Fed) hawkish shift in December has been a key factor behind the recent surge in the US Treasury bond yields. The resultant widening of the US-Japan yield differential turns out to be another factor undermining the lower-yielding JPY. Apart from this, a generally positive tone around the equity markets is holding back traders from placing bullish bets around the safe-haven JPY. That said, subdued US Dollar (USD) price action acts as a headwind for the USD/JPY pair ahead of the release of the latest US consumer inflation figures. The crucial US Consumer Price Index (CPI) report might influence the Fed’s policy path and drive the USD demand.
Japanese Yen bears not ready to give up amid doubts over BoJ’s rate-hike plan
- A fall in Japan’s household spending and real wages for the fourth successive month in November amid higher prices, keeping the door open for a rate hike by the Bank of Japan in January or March.
- BoJ Deputy Governor Ryozo Himino said on Tuesday that the central bank will discuss potentially raising the policy rate at the January meeting, though he did not strongly signal a hike next week.
- Some economists think that the BoJ will assess US President-elect Donald Trump’s economic policies and wait until the results of Japan’s annual spring wage negotiations become available in March.
- The Reuters Tankan poll showed that Japanese manufacturers’ sentiment recovered in January after a dip last month, but their outlook remains flat due to uncertainty over proposed Trump policies.
- The yield on the benchmark 10-year US government bond remains close to a 14-month high in the wake of growing acceptance that the Federal Reserve will pause its rate-cutting cycle later this month.
- Against the backdrop of the upbeat US Nonfarm Payrolls report released on Friday, a moderate rise in the US producer prices makes it difficult for investors to project the Fed’s next moves on interest rates.
- The Bureau of Labor Statistics (BLS) reported that the Producer Price Index rose 3.3% in December from a year earlier, marking a notable uptick from 3.0% previous, though it fell short of the 3.4% expected.
- The US Dollar extended Monday’s retracement slide from over a two-year peak and acts as a headwind for the USD/JPY pair as traders now look to the US Consumer Price Index for a fresh impetus.
- The headline US CPI is expected to rise 0.3% in December and the yearly rate to 2.9% from 2.7% in November. The core CPI, meanwhile, is anticipated to hold steady and come in at a 3.3% YoY rate.
USD/JPY dip towards 157.50-157.45 might still be seen as buying opportunity
From a technical perspective, bulls are likely to wait for sustained strength and acceptance above the 158.00 mark before placing fresh bets. Given that oscillators on the daily chart are holding in positive territory and are still a distance away from being in the overbought zone, the USD/JPY pair might then aim to retest the multi-month top, around the 158.85-158.90 zone. Some follow-through buying above the 159.00 mark will set the stage for further gains towards the next relevant hurdle near the mid-159.00s before spot prices aim to reclaim the 160.00 psychological mark.
On the flip side, the 157.45 area now seems to protect the immediate downside ahead of the 157.00 mark. Any further slide could be seen as a buying opportunity around the 156.25-156.20 area, or last week’s swing low. This should help limit the downside for the USD/JPY pair near the 156.00 mark, which if broken decisively might shift the near-term bias in favor of bearish traders and pave the way for some meaningful 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.
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