- The Japanese Yen remains depressed near a multi-month low against the USD.
- The BoJ’s dovish stance and a positive risk tone undermine the safe-haven JPY.
- The Fed’s hawkish outlook for 2025 acts as a tailwind for the USD/JPY pair.
The Japanese Yen (JPY) struggle to gain any meaningful traction during the Asian session on Tuesday and remains well within striking distance of a multi-month low against its American counterpart. Skepticism over the Bank of Japan’s (BoJ) intentions to hike interest rates further, along with the Federal Reserve’s (Fed) hawkish shift, tempers expectations of a sharp narrowing in the US-Japan rate differential. This, along with a generally positive risk tone, continues to undermine the JPY.
Meanwhile, strong inflation data from Japan recently left the door open for a potential BoJ rate hike in January or March. This, along with geopolitical risks stemming from the protracted Russia-Ukraine war and tensions in the Middle East, along with trade war fears, might hold back bearish traders from placing aggressive bets around the safe-haven JPY. That said, a bullish US Dollar (USD) should to act as a tailwind for the USD/JPY pair amid thin trading volumes on Christmas Eve.
Japanese Yen bears have the upper hand amid BoJ’s dovish outlook
- The Bank of Japan October meeting Minutes released this Tuesday reiterated the possibility of gradual rate hikes if inflation trends align with expectations, with a potential path to 1.0% by late fiscal 2025.
- The BoJ Minutes also emphasized a cautious approach to monetary policy, wage-driven economic growth amid domestic and global uncertainties and fiscal measures to counter deflationary pressures.
- BoJ Governor Kazuo Ueda said last week that the central bank preferred to await data on whether wages would retain their upward momentum next year and to gain clarity on Trump’s economic policies.
- Investors now seem convinced that the BoJ will not hike interest rates at its next monetary policy meeting in January and wait until March, which, in turn, continues to undermine the Japanese Yen on Tuesday.
- As the market continues to adjust to the Federal Reserve’s (Fed) less dovish outlook for 2025, the yield on the benchmark 10-year US government bond shot to its highest level since May the previous day.
- The US Dollar remains close to a two-year peak and seems unaffected by a slight disappointment from the Conference Board’s US Consumer Confidence index, which fell to 104.7 from 111.7 previously.
- Investors now look to the release of the Richmond Manufacturing Index from the US for some impetus amid relatively thin trading volumes on Christmas Eve.
USD/JPY bulls might await move beyond 158.00 before placing fresh bets
From a technical perspective, the multi-month top, around the 158.00 neighborhood touched last Friday, could act as an immediate hurdle. A sustained strength beyond the said handle will be seen as a fresh trigger for bulls and lift the USD/JPY pair to the 158.45 intermediate resistance en route to the 159.00 mark amid positive oscillators on the daily chart.
On the flip side, weakness below the 157.00 round figure now seems to find decent support near the 156.65 horizontal zone, below which the USD/JPY pair could slide to the 156.00 mark. Any further decline could be seen as a buying opportunity near the 155.50 region and seems limited near the 155.00 psychological mark. The latter should act as a strong base for spot prices.
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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