- The Japanese Yen regains some positive traction following the previous day’s sharp decline.
- The USD bulls seem reluctant to place aggressive bets and opt to wait for the Fed decision.
- A positive risk tone might cap gains for the safe-haven JPY and lend support to USD/JPY.
The Japanese Yen (JPY) attracts some buyers during the Asian session on Wednesday and recovers a part of the previous day’s losses against its American counterpart part amid expectations of more interest rate hikes by the Bank of Japan (BoJ). Apart from this, the recent decline in the US Treasury bond yields, fueled by rising bets that the Federal Reserve (Fed) would keep cutting rates in 2025, should limit the downside for the lower-yielding JPY.
Meanwhile, the US Dollar (USD) struggles to capitalize on Tuesday’s goodish recovery from over a one-month low and also contributes to the USD/JPY pair’s modest downtick. That said, concerns about the economic fallout from US President Donald Trump’s threatened tariffs, along with a generally positive risk tone, cap the safe-haven JPY. Traders might opt to wait on the sidelines ahead of the FOMC monetary policy decision, due to be announced later today.
Japanese Yen draws some support from bets for more rate hikes by BoJ; lacks bullish conviction
- The Japanese Yen retreated sharply on Tuesday, from a six-week high touched the previous day, following fresh tariff threats from US President Donald Trump.
- Trump said late on Monday that he plans to impose duties on imported computer chips, pharmaceuticals, and metals to push companies to boost domestic production.
- The US Dollar staged a solid recovery from over a one-month low amid speculations that Trump’s protectionist policies could reignite inflationary pressures.
- The US Census Bureau reported on Tuesday that Durable Goods Orders declined 2.2% in December, compared to a 2% fall in November and a 0.8% rise expected.
- The Conference Board’s (CB) Consumer Confidence Index dropped to 104.1 in January from 109.5 previous, while the Present Situation Index fell to 134.3.
- Minutes of the December Bank of Japan meeting released this Wednesday showed that members emphasized the need for cautious monetary policy adjustments.
- Meanwhile, investors are more confident that the BoJ will continue its move towards normalization and deliver additional interest rate hikes in 2025.
- Moreover, hopes that Japan’s spring wage negotiations will result in strong hikes again this year, which should allow the BoJ to tighten its policy further.
- In contrast, market participants have been pricing in the possibility that the Federal Reserve will lower borrowing costs twice by the end of this year.
- Investors await the outcome of a two-day FOMC meeting, which will play a key role in driving the USD and provide a fresh impetus to the USD/JPY pair.
USD/JPY is likely to find support near the 155.00 psychological mark; not out of the woods yet
This week’s breakdown below a multi-month-old ascending channel favors bearish traders amid slightly negative oscillators on the daily chart. Hence, any subsequent move up beyond the 156.00 mark could be seen as a selling opportunity and remain capped near the 156.60-156.70 supply zone. Some follow-through buying, however, could trigger a short-covering rally and lift the USD/JPY pair beyond the 157.00 mark, towards the 157.45 hurdle. The momentum could extend further towards the 158.00 mark en route to the 158.85-158.90 region, or a multi-month top touched on January 10.
On the flip side, the 155.00 psychological mark now seems to protect the immediate downside ahead of the 154.55-154.50 horizontal zone and the 154.00 round figure. This is closely followed by the weekly swing low, around the 153.70 area touched Monday, below which the USD/JPY pair could accelerate the fall further towards the 153.30 support before eventually dropping to the 153.00 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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