- The Japanese Yen continues to be undermined by the uncertainty over the BoJ’s rate-hike plans.
- Rising US bond yields turn out to be another factor exerting pressure on the lower-yielding JPY.
- Intervention fears and a softer risk tone might help limit any meaningful downfall for the JPY.
The Japanese Yen (JPY) struggles to capitalize on a modest Asian session uptick and drops to its lowest level since late July, around the 151.00 mark against its American counterpart in the last hour. Investors now seem convinced that the Bank of Japan (BoJ) will forgo raising interest rates again this year amid uncertainty over the new political leadership’s preference for the monetary policy. This, in turn, continues to undermine the JPY ahead of the general election on October 27.
Meanwhile, concerns about the potential for rising deficit spending after the November 5 US Presidential election and bets for a less aggressive policy easing by the Federal Reserve (Fed) pushed the US Treasury bond yields to their highest levels in almost three months. This further contributes to capping the upside for the lower-yielding JPY, though intervention fears might keep a lid on any meaningful depreciating move amid a generally softer tone around the equity markets.
Daily Digest Market Movers: Japanese Yen remains depressed despite intervention fears
- The Japanese Yen has attracted some buyers on Tuesday amid speculations about possible government intervention, especially after the recent fall below the 150.00 psychological mark against its American counterpart.
- Japan’s vice finance minister for international affairs, Atsushi Mimura, said last Friday that excess volatility in the FX market is undesirable and that authorities are closely watching FX moves with a high sense of urgency.
- The Bank of Japan Governor Kazuo Ueda signaled last week that the central bank is not in a rush to raise interest rates further and emphasized the need to focus on the economic impact of unstable markets and overseas risks.
- Furthermore, dovish comments from Japanese Prime Minister Shigeru Ishiba add a layer of uncertainty over the new political leadership’s preference for the monetary policy, which is likely to act as a headwind for the JPY.
- Meanwhile, the US Dollar jumped to its highest level since early August amid growing conviction that the Federal Reserve will proceed with modest rate cuts over the next year as the US economy remains relatively healthy.
- Dallas Fed President Lorie Logan said on Monday that she expects gradual rate cuts if the economy meets forecasts and that the US central bank will need to be nimble with monetary policy choices amid risks to inflation target.
- Separately, Minneapolis Fed President Neel Kashkari noted that investors should expect a modest pace of rate cuts over the next few quarters, though evidence of quick labor market weakening could lead to faster rate cuts.
- Adding to this, Kansas Fed President Jeffrey Schmid said that the US central bank must prevent significant fluctuations in interest rates and urged careful, steady, and purposeful methods for reducing interest rates.
- Meanwhile, expectations that Donald Trump’s win in the November 5 US Presidential election could see the launch of further potentially inflation-generating tariffs triggered the overnight selloff in US government debt.
- The yield on the rate-sensitive 2-year US government bond closed at its highest since August 19 on Monday, while the benchmark 10-year US Treasury yield touched the highest since July 26, underpinning the US Dollar.
Technical Outlook: USD/JPY looks to build on momentum beyond the 151.00 mark
From a technical perspective, any subsequent slide now seems to find immediate support near the 150.30-150.25 region ahead of the 150.00 psychological mark. A convincing break below the latter could make the USD/JPY pair vulnerable to an accelerated drop further towards the 149.65-149.60 intermediate support en route to the 149.10-149.00 area. Some follow-through selling will suggest that the positive move witnessed over the past month or so has run its course and shift the near-term bias in favor of bearish traders.
On the flip side, bulls might now wait for a sustained strength above the 151.00 mark before placing fresh bets. Given that oscillators on the daily chart are holding comfortably in positive territory, the USD/JPY pair might then climb to the 151.60 area before aiming to reclaim the 152.00 round figure. The momentum could extend further towards the 152.65-152.70 region en route 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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