Japanese Yen rallies to near two-month top against USD amid hawkish BoJ expectations
- The Japanese Yen strengthens against the USD for the third straight day on Thursday.
- The divergent BoJ-Fed policy expectations continue to underpin the lower-yielding JPY.
- A positive risk tone does little to dent bullish sentiment surrounding the safe-haven JPY.
The Japanese Yen (JPY) remains on the front foot against its American counterpart during the Asian session on Thursday amid the growing acceptance that the Bank of Japan (BoJ) would keep raising interest rates. The bets were reaffirmed by better-than-expected Japanese wage data on Wednesday. In contrast, the Federal Reserve (Fed) is expected to lower borrowing costs further by the end of this year. This would result in the narrowing of the rate differential between Japan and the US, which turns out to be another factor driving flows toward the lower-yielding JPY.
Meanwhile, the prospects for further policy easing by the Fed, along with the recent decline in the US Treasury bond yields, keep the US Dollar (USD) depressed near its lowest level in over a week. This, in turn, is seen exerting downward pressure on the USD/JPY pair for the third successive day and drags spot prices to the 151.80 area, or the lowest level since December 12. It, however, remains to be seen if the JPY bulls can retain control amid worries that Japan would also be an eventual target for US President Donald Trump's trade tariffs and the risk-on mood.
Japanese Yen continues to gain positive traction amid rising BoJ rate hike bets
- Data released on Wednesday showed a rise in Japan's real wages, which reaffirms bets that the Bank of Japan will raise interest rates again and continues to underpin the Japanese Yen.
- Japan's Finance Minister, Katsunobu Kato, said on Thursday that he sees inflationary conditions as prices continue to rise further, though the end of deflation has not yet been achieved.
- Separately, BoJ Board Member, Tamura Naoki, backed faster interest rate hikes and said that the central bank must raise rates at least to around 1% in the latter half of fiscal 2025.
- According to LSEG, market participants are currently pricing around a 94.8% chance for a quarter-point hike by the BoJ at its September monetary policy meeting.
- In contrast, the markets are pricing in the possibility that the Federal Reserve will cut interest rates twice by the end of this year amid signs of a slowdown in the US job market.
- The Job Openings and Labor Turnover Survey (JOLTS) showed on Tuesday that the number of job openings fell from 8.09 million in the previous month to 7.6 million in December.
- Moreover, the Institute of Supply Management (ISM) reported that the economic activity in the US service sector continued to expand in January, albeit at a softer pace than in December.
- The US ISM Services PMI declined from 54.0 to 52.8 in January and the Prices Paid Index dropped to 60.4 from 64.4, while the Employment Index edged higher to 52.3 from 51.3.
- The softer services activity data dragged the US Treasury bond yields lower, which undermined the US Dollar and exerted heavy downward pressure on the USD/JPY pair.
- The USD failed to gain respite from the Automatic Data Processing (ADP) report, which showed that the private sector added 183K in January compared to 176K in the previous month.
- Fed Vice Chair Philip Jefferson said on Thursday that he is happy to keep the Fed Funds on hold at the current level and that he will wait to see the net effect of Trump's policies.
- Thursday's US economic docket features the release of Challenger Job Cuts and the usual Weekly Initial Jobless Claims data, which might provide some impetus to the Greenback.
- The market focus, however, will remain glued to the closely-watched US monthly employment details – popularly known as Nonfarm Payrolls (NFP) report due on Friday.
USD/JPY seems vulnerable after the overnight breakdown below the 152.50 confluence
From a technical perspective, the overnight breakdown and close below the 152.50-152.45 confluence – comprising the 100- and the 200-day Simple Moving Averages (SMAs) was seen as a fresh trigger for bearish traders. A subsequent fall below the 152.00 mark validates the negative outlook and suggests that the path of least resistance for the USD/JPY pair remains to the downside. Given that oscillators on the daily chart are still away from being in the oversold zone, spot prices could slide further toward the 151.50 intermediate support en route to the 151.00 mark and the 150.60 horizontal support.
On the flip side, an attempted recovery might now confront stiff resistance and remain capped near the 152.50 confluence support breakpoint. A sustained strength beyond, however, might trigger a short-covering rally and lift the USD/JPY pair beyond the 153.00 mark, toward testing the next relevant hurdle near the 153.70-153.80 region. This is closely followed by the 154.00 round figure, which if cleared might negate the negative outlook and shift the near-term bias in favor of bullish traders.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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