- The Japanese Yen struggles to capitalize on Friday’s modest recovery gains against the US Dollar.
- Doubts over BoJ’s rate hike plan, and the widening of the US-Japan yield differential, weigh on the JPY.
- Traders now look to the US Consumer Confidence Index for short-term impetus later this Monday.
The Japanese Yen (JPY) edges lower against its American counterpart at the start of a new week and erodes a part of Friday’s goodish recovery gains from a five-month low. Investors remain sceptical about the Bank of Japan’s (BoJ) intentions to hike interest rates further, which, along with a generally positive risk tone, undermines the safe-haven JPY. Apart from this, the recent widening of the US-Japan yield differential, bolstered by the Federal Reserve’s (Fed) hawkish shift, turns out to be another factor weighing on the lower-yielding JPY.
That said, strong inflation data released from Japan on Friday left the door open for a potential BoJ rate hike in January or March. Apart from this, persistent geopolitical risks stemming from the protracted Russia-Ukraine war and tensions in the Middle East, along with trade war fears, might support the JPY. Bears might further refrain from placing aggressive bets amid speculations that Japanese authorities might intervene to prop up the domestic currency, which, along with subdued US Dollar (USD) price action, might cap the USD/JPY pair.
Japanese Yen bears have the upper hand amid lack of clarity about the timing of next BoJ rate hike
- The Bank of Japan last week decided to keep the short-term rate target unchanged at the end of the December policy meeting and offered few clues on how soon it could push up borrowing costs.
- Japanese government bond yields dropped to the lowest in a month on Friday in reaction to BoJ Governor Kazuo Ueda’s dovish signals and a very cautious tone on further monetary policy tightening.
- The benchmark 10-year US government bond yield rose to its highest level in more than six months last week and the resultant widening of the US-Japan yield differential undermines the Japanese Yen.
- A government report showed on Friday that Japan’s National Consumer Price Index (CPI) rose more than expected in November, which bodes well with further BoJ interest rate hikes in early 2025.
- The US Dollar retreated from a two-year high on Friday after the Personal Consumption Expenditure (PCE) Price Index pointed to signs of inflation moderation and lingering challenges for the economy.
- According to a report published by the US Bureau of Economic Analysis (BEA), the PCE Price Index edged higher to 2.4% on a yearly basis in November from 2.3% in the previous month.
- The core gauge, which excludes volatile food and energy prices, rose 2.8% during the reported period, matching October’s reading but arriving below the market expectation of 2.9%.
- Additional details of the report revealed that Personal Income grew 0.3% in November, which marked a sharp deceleration relative to the outsized 0.7% increase recorded in October.
- Meanwhile, Consumer Spending, which accounts for more than two-thirds of US economic activity, climbed 0.4% last month after a downwardly revised reading of 0.3% in October.
- Investors now look forward to the release of the Conference Board’s US Consumer Confidence Index for short-term trading opportunities on the first day of a holiday-shortened week.
USD/JPY any further move up is likely to confront some resistance near the 157.00 round-figure mark
From a technical perspective, Friday’s low, around the 156.00-155.95 area, now seems to protect the immediate downside. Any further decline might be seen as a buying opportunity near the 155.50 horizontal zone. This next relevant support is pegged near the 155.00 psychological mark, which if broken decisively, might shift the near-term bias in favor of bearish traders and make the USD/JPY pair vulnerable to weaken further.
On the other end, the 157.00 round figure now seems to act as an immediate hurdle ahead of the 157.40-157.45 region and the multi-month peak, around the 157.90 area touched on Friday. Some follow-through buying beyond the 158.00 mark will be seen as a fresh trigger for bullish traders amid positive oscillators on the daily chart. The USD/JPY pair might then climb to the 158.45 intermediate hurdle before aiming to reclaim the 159.00 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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