The Japanese Yen (JPY) maintains its offered tone through the Asian session on Tuesday, though the supportive fundamental backdrop warrants some caution for aggressive bearish traders. Bank of Japan (BoJ) Governor Kazuo Ueda signaled on Monday that a December interest rate increase could be under consideration. This, along with intervention fears, helps limit deeper JPY losses.
Meanwhile, a generally positive risk tone is seen undermining the JPY’s safe-haven status and assisting the USD/JPY pair to build on the overnight bounce from the 154.65 region, or a two-week low. The US Dollar (USD), on the other hand, struggles to attract any meaningful buyers amid bets for another rate cut by the US Federal Reserve (Fed) this month, and caps the upside for spot prices.
Japanese Yen struggles to lure buyers despite rising BoJ rate hike bets
- Asian stocks stage a modest recovery after the previous day’s selloff, undermining traditional safe-haven assets and prompting some selling around the Japanese Yen during the Asian session on Tuesday. This, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in building on the overnight bounce from the 154.65 region, or a two-week low.
- Bank of Japan Governor Kazuo Ueda offered the strongest signal yet toward further normalization and said on Monday that the likelihood of the central bank’s economic and price projections being met is rising. In fact, inflation in Japan has remained above the central bank’s 2% target for over three years, strengthening the case for policy tightening.
- Traders were quick to react and are pricing in a roughly 80% chance of a rate hike at the December 18-19 BoJ meeting, up from around 60% last week. The outlook pushed the rate-sensitive two-year Japanese government bond yield to 1% for the first time since June 2008 on Monday, and the 20-year yield to levels not seen since November 2020.
- Moreover, the 30-year government bond yields climbed to a record peak on Tuesday, and the 10-year yield reached a 17-year high, which, in turn, backs the case for the emergence of some dip-buying around the JPY.
- Japan’s Finance Minister Satsuki Katayama said on Sunday that recent erratic swings in the foreign exchange market and rapid JPY weakening are clearly not driven by fundamentals. It’s our position to issue warnings against such matters, Katayama added further, fueling speculations about the government intervention to stem any further JPY weakness.
- The US Dollar dived to a two-week low on Monday after the Institute for Supply Management’s (ISM) Manufacturing PMI fell to 48.2 in November, down from 48.7 in the previous month. The reading missed consensus estimates and comes on top of the recent tepid US economic data, suggesting that growth in the world’s largest economy is cooling.
- Moreover, dovish signals from Federal Reserve officials fueled speculation for another rate reduction this month. In fact, the CME Group’s FedWatch Tool indicates a nearly 88% chance of a quarter-point rate cut at the Fed’s December 9–10 meeting. This marks a big divergence in comparison to the BoJ’s hawkish outlook and should cap the USD/JPY pair.
- Heading into next week’s Fed rate decision, investors will confront the release of the US Personal Consumption Expenditure (PCE) Price Index – the central bank’s preferred inflation gauge – for more cues about the future rate-cut path. The uncertainty, however, remains in the absence of the official jobs report because of the recent federal government shutdown.
USD/JPY needs to surpass 156.00 to back the case for additional gains
The USD/JPY pair’s corrective slide from the 158.00 neighborhood, or the highest level since mid-January, touched last month, has been along a downward-sloping channel. The overnight bounce validates the trend-channel support, which coincides with the 61.8% Fibonacci retracement level of the November upswing and should now act as a key pivotal point. A convincing break below will be seen as a fresh trigger for bearish traders and pave the way for an extension of the pair’s two-week-old downtrend. In the meantime, the 155.00 psychological mark could protect the immediate downside.
On the flip side, any subsequent move up is likely to confront stiff resistance around the 156.00 neighborhood, representing the top boundary of the aforementioned trend-channel. A sustained strength beyond could trigger a short-covering rally and lift the USD/JPY pair to the 156.60-156.65 intermediate hurdle en route to the 157.00 round figure. The momentum could extend further towards mid-157.00s before spot prices make a fresh attempt to reclaim the 158.00 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.
