The Japanese Yen (JPY) edges lower against the rebounding US Dollar (USD) during the Asian session on Thursday, though any meaningful depreciation seems elusive. Traders ramped up their bets for an imminent rate hike by the Bank of Japan (BoJ) following Governor Kazuo Ueda’s remarks earlier this week. Moreover, a survey showed on Wednesday that private sector output in Japan recorded modest expansion for the eighth straight month in November, backing the case for further BoJ policy normalization. This, in turn, might continue to underpin the JPY.
Meanwhile, prospects for BoJ tightening, along with a reflationary push by new Prime Minister Sanae Takaichi, keep super-long-dated Japanese government bonds (JGB) under pressure. The resultant narrowing of the rate differential between Japan and other major economies could further benefit the lower-yielding JPY. The USD, on the other hand, might struggle to attract any meaningful buyers amid the growing acceptance that the Federal Reserve (Fed) will cut interest rates again next week. This should contribute to capping the upside for the USD/JPY pair.
Japanese Yen bulls turn cautious amid receding safe-haven demand; BoJ rate hike bets could lend support
- Bank of Japan Governor Kazuo Ueda gave the clearest hint so far of an impending rate hike and said on Monday that the central bank would consider the pros and cons of raising its policy rate at its December 18-19 meeting. Ueda added that real interest rates were deeply negative, and another hike would still leave borrowing costs low.
- Japan’s S&P Global Composite PMI was finalized at 52.0 for November, marking the strongest reading since August. It also signaled an eighth consecutive month of private-sector expansion amid a quicker rise in services and a slower contraction in manufacturing. Moreover, business confidence strengthened to its highest level since January.
- This, in turn, reaffirmed bets that the BoJ will raise its rate by a quarter percentage point, to 0.75% this month. Moreover, Prime Minister Sanae Takaichi’s massive spending plan, to be funded by new debt issuance, pushed the yield on 30-year Japanese government bonds to a record high on Thursday and should benefit the Japanese Yen.
- The US Dollar, on the other hand, dropped to its lowest level since late October on Wednesday amid the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs at the end of next week’s policy meeting. The expectations were reaffirmed by weaker-than-expected US private-sector employment details released on Wednesday.
- The Automatic Data Processing (ADP) reported that private-sector employers shed 32,000 jobs in November, compared to the 47,000 increase (revised from 42,000) in the previous month. This figure came in below expectations for an addition of 5,000 and also marked the largest monthly decline since early 2023, pointing to a weakening US labor market.
- Traders now look forward to Thursday’s US economic docket, featuring Challenger Job Cuts and the usual Weekly Initial Jobless Claims. The focus, however, will remain glued to the US Personal Consumption Expenditure (PCE) Price Index on Friday, which will drive the near-term USD demand and provide a fresh impetus to the USD/JPY pair.
USD/JPY needs to find acceptance above the 100-hour SMA to back the case for further gains
The overnight slide followed Tuesday’s failure to find acceptance above the 100-hour Simple Moving Average (SMA) and the 156.00 round figure, which, in turn, favors the USD/JPY bears. However, slightly positive oscillators on the daily chart suggest that any further decline could find decent support near the 155.00 psychological mark. A convincing break below the latter will reaffirm the negative outlook and set the stage for an extension of the recent pullback from the 158.00 neighborhood, or the highest level since January touched last month.
On the flip side, the 100-hour SMA, currently pegged near the 155.70 region, could act as an immediate hurdle and cap any attempted recovery move. This is closely followed by the 156.00 mark, above which a fresh bout of short-covering could lift the USD/JPY pair to the next relevant hurdle near the 156.60-156.65 region 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 conquer 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.