- The Japanese Yen attracts safe-haven flows and strengthens for the third straight day.
- The BoJ rate hike uncertainty might hold back the JPY bulls from placing fresh bets.
- Hawkish Fed expectations underpin the USD and lend support to the USD/JPY pair.
The Japanese Yen (JPY) remains on the front foot against its American counterpart for the third successive day on Monday and moves away from a multi-month low touched last week. Against the backdrop of geopolitical risks, growing acceptance that the Federal Reserve (Fed) will pause its rate-cutting cycle later this month temper investors’ appetite for riskier assets and benefit the safe-haven JPY.
Furthermore, the broadening inflationary pressure in Japan keeps the door open for another interest rate hike by the Bank of Japan (BoJ) in January or March. This turns out to be another factor underpinning the JPY, though bets that the BoJ may wait until April to seek confirmation that strong wage momentum will carry over into the spring negotiations might keep a lid on any meaningful appreciation.
Moreover, the recent widening of the US-Japan yield differential could also contribute to capping the lower-yielding JPY. This, along with the underlying bullish sentiment surrounding the US Dollar (USD), should act as a tailwind for the USD/JPY pair, warranting some caution before positioning for a deeper corrective slide. Traders might also opt to wait for this week’s release of the latest US inflation figures.
Japanese Yen is underpinned by the risk-off mood; BoJ uncertainty caps gains
- A mix of geopolitical tensions and rate jitters temper investors’ appetite for riskier assets, which, in turn, benefits traditional safe-haven assets and drives flows towards the Japanese Yen for the third straight day on Monday.
- The Office of Foreign Assets Control (OFAC) said on Friday that the US and the UK administration imposed tougher sanctions against Russia’s oil industry, targeting nearly 200 vessels of the so-called shadow fleet.
- The Russian Defence Ministry said on Sunday that Russian forces have carried out strikes on Ukrainian military airfields, personnel and vehicles in 139 locations using its air force, drones, missiles and artillery.
- In an apparent violation of the ceasefire agreement between Israel and Hezbollah, more Israeli strikes have been reported in Lebanon. Moreover, Israeli strikes continued across Gaza amid renewed ceasefire talks.
- The US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls rose by 256,000 in December compared to 212,000 in the previous month and market expectations for a reading of 160,000.
- Other details showed that the Unemployment Rate unexpectedly edged lower to 4.1% from 4.2%, while annual wage inflation, as measured by the change in the Average Hourly Earnings, declined to 3.9%.
- The upbeat US jobs report reinforced market expectations that the Federal Reserve will pause its rate-cutting cycle at its upcoming policy meeting later this month amid lingering inflation and political uncertainty.
- This, in turn, pushed the US Dollar to over a two-year peak and the US Treasury yields to the highest in over a year, widening the US-Japan yield differential, which should cap the upside for the lower-yielding JPY.
- The market focus now shifts to the release of the US Producer Price Index (PPI) and the US Consumer Price Index (CPI) on Tuesday and Wednesday, respectively, which will play a key role in influencing the USD/JPY pair.
USD/JPY needs to move back above the 158.00 mark for bulls to retain control
From a technical perspective, Friday’s low, around the 157.20-157.20 region, could offer immediate support ahead of the 157.00 mark and the 156.80-156.75 support zone. Any further weakness could be seen as a buying opportunity near last week’s swing low, around the 156.25-156.20 area. 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 deeper losses.
On the flip side, the Asian session high, around the 158.00 neighborhood, now seems to act as an immediate hurdle ahead of the 158.45-158.50 region and the 158.85-158.90 zone, or the multi-month peak touched on Friday. Some follow-through buying beyond the 159.00 mark will be seen as a fresh trigger for bulls and lift the USD/JPY pair towards the next relevant hurdle near mid-159.00s en route to the 160.00 psychological mark.
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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