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Japanese Yen struggles to lure buyers, not out of the woods yet

  • The Japanese Yen remains on the defensive against the buck in the wake of the BoJ rate uncertainty.
  • The USD stands tall near a two-month top amid bets for a less aggressive policy easing by the Fed.
  • The divergent BoJ-Fed policy expectations might cap any meaningful upside for the USD/JPY pair. 

The Japanese Yen (JPY) remains on the defensive against its American counterpart at the start of a new week and languishes near its lowest level since early August during the first half of the European session. The recent comments by Japan’s Prime Minister Shigeru Ishiba, saying that the economy was not ready for further interest rate hikes, raised doubt about the Bank of Japan’s (BoJ) rate hike plans. This, along with a generally positive tone around the equity markets, is seen undermining demand for the safe-haven JPY. 

Apart from this, the recent US Dollar (USD) bullish run to a two-month peak, bolstered by expectations for a less aggressive policy easing by the Federal Reserve (Fed), turns out to be another factor acting as a tailwind for the USD/JPY pair. Investors, however, are still pricing in a greater chance of a 25 basis points interest rate cut by the Fed in November. In contrast, the BoJ is expected to stick to its rate-hiking cycle. This warrants caution before placing fresh bullish bets around the USD/JPY pair and positioning for further gains. 

Daily Digest Market Movers: Japanese Yen remains depressed amid BoJ rate hike uncertainty, positive risk tone

  • The futures market implies a less than 50% chance that the Bank of Japan will hike interest rates by 10 basis points before the end of this year in the wake of Japanese Prime Minister Shigeru Ishiba’s dovish turn earlier this October. 
  • Moreover, a drop in Japan’s real wages for the first time in three months, declining household spending and signs that price pressures from raw material costs were subsiding cast doubts over how aggressively the BoJ could raise rates.
  • China’s finance ministry hinted at more debt issuance amid efforts to shore up the domestic economy and said that the central government has room for a deficit increase, though fell short of providing specific details of the stimulus. 
  • Investors, however, seem optimistic that comprehensive measures will be introduced to stabilize key sectors of the economy and further took cues from the recent rally in the US equity indices, which touched record highs on Friday.
  • The US Bureau of Labor Statistics reported that the headline Producer Price Index (PPI) for final demand rose 1.8% and the core gauge climbed 2.8% on a yearly basis in September, both coming in slightly above market expectations.
  • This comes on top of last Thursday’s hotter-than-expected US consumer inflation figures and closes the door for another jumbo rate cut by the Federal Reserve in November, pushing the US Dollar back closer to a two-month top.
  • That said, the US central bank is still expected to continue lowering interest rates amid signs of labor market weakness and the BoJ is anticipated to hike rates again by the year-end, which caps the upside for the USD/JPY pair. 

Technical Outlook: USD/JPY bullish potential seems intact, move towards  the 150.00 psychological mark is on the cards

From a technical perspective, the recent breakout through the 50-day Simple Moving Average (SMA) barrier – for the first time since mid-July – and acceptance above the 38.2% Fibonacci retracement level of the July-September downfall favors bulls. This, along with positive oscillators on the daily chart, suggests that the path of least resistance for the USD/JPY pair remains to the upside. Some follow-through buying beyond last week’s swing high, around the 149.55-149.60 region, will reaffirm the positive bias and lift spot prices to the 150.00 psychological mark. The momentum could extend further towards the 50% Fibo. level, around the 150.75-150.80 region.

On the flip side, any meaningful slide below the 149.00 round figure could be seen as a buying opportunity near the 148.55 region. This should help limit the downside for the USD/JPY pair near the 148.00 mark. The latter is likely to act as a key pivotal point, which if broken decisively might prompt some technical selling and drag spot prices to the 147.35 intermediate support en route to the 147.00 mark and the 146.50 area.

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.