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Japanese Yen hangs near monthly low against USD; not out of the woods yet

  • The Japanese Yen drops to a fresh monthly low against the USD on Friday.
  • Fading hopes for a December BoJ rate hike continue to undermine the JPY.
  • Elevated US bond yields offer support to the USD and the USD/JPY pair. 

The Japanese Yen (JPY) remains on the back foot against its American counterpart for the fifth straight day and drops to over a two-week low during the Asian session on Friday. The growing market conviction that the Bank of Japan (BoJ) will not raise interest rates at its upcoming policy meeting next week continues to undermine the JPY. Adding to this, expectations for a less dovish Federal Reserve (Fed) remain supportive of the recent move up in the US Treasury bond yields, which turns out to be another factor driving flows away from the lower-yielding JPY.

That said, a softer risk tone, along with persistent geopolitical risks and concerns about US President-elect Donald Trump’s tariff plans, offer some support to the safe-haven JPY. The US Dollar (USD), on the other hand, consolidates its weekly gains to a fresh monthly peak and fails to assist the USD/JPY pair to build on the momentum beyond the 153.00 mark. Traders also seem reluctant to place aggressive bets and might now opt to move to the sidelines ahead of next week’s key central bank event risks – the highly-anticipated FOMC and the BoJ policy meetings. 

Japanese Yen bulls remain on the sidelines amid doubts over BoJ’s rate-hike plan

  • The Bank of Japan’s quarterly Tankan survey showed on Friday that the headline index measuring big manufacturers’ business confidence rose to +14  during the September-December period, marking the highest reading since March 2022. Furthermore, firms expect inflation to rise 2.4% a year from now.
  • Expectations that consumer prices in Japan will remain above the BoJ’s 2% target, along with a moderately expanding economy and a rise in wages by the fastest rate since November 1992, give the BoJ another reason to hike interest rates. That said, media reports suggested that the BoJ may skip a rate hike this month.
  • Reuters, citing sources familiar with the Bank of Japan’s thinking, reported on Thursday that the central bank is leaning toward keeping interest rates steady next week. The report added that policymakers prefer to spend more time scrutinising overseas risks and clues on next year’s wage outlook.
  • A Bloomberg report on Wednesday said that BoJ officials see little cost to waiting before raising interest rates while still being open to a hike next week depending on data and market developments. This, along with mixed signals from BoJ officials, adds to uncertainty over the December policy decision.
  • BoJ Governor Kazuo Ueda recently said that the timing of the next rate hike was approaching. In contrast, BoJ’s dovish board member, Toyoaki Nakamura said that the central bank must move cautiously in raising rates. This continues to weigh on the Japanese Yen and lifts the USD/JPY pair to over a two-week high. 
  • The US Bureau of Labor Statistics reported on Thursday that the headline Producer Price Index (PPI) rose 0.4% in November, from the previous month’s upwardly revised 0.3% gain. Moreover, the yearly rate accelerated from the 2.6% increase recorded in October to 3% during the reported month.
  • The annual core PPI rose 0.2% in November and stood at 3.4% compared to the same time period last year, beating estimates. This comes on top of the US consumer inflation figures on Wednesday and signals that the progress in lowering inflation toward the Federal Reserve’s 2% target has stalled.
  • This might force the Fed to adopt a more cautious stance and point to fewer rate cuts coming at a slower pace than previously anticipated. This remains supportive of a further rise in the US Treasury bond yields high, pushing the US Dollar to a fresh monthly peak and also weighing on the lower-yielding JPY. 
  • The market attention now shifts to the key central bank event risks next week – the outcome of the highly-anticipated two-day FOMC monetary policy meeting and the crucial BoJ decision. In the meantime, traders might opt to move to the sidelines and refrain from placing aggressive directional bets.

USD/JPY bulls have the upper hand, 153.70-153.80 confluene hurdle breakout in play

From a technical perspective, the lack of follow-through buying beyond the 152.70-152.80 confluence warrants some caution for bullish traders. The said area comprises the 200-period Simple Moving Average (SMA) on the 4-hour chart and the 50% retracement level of the recent pullback from the multi-month high. Given that oscillators on daily/4-hour charts are holding in positive territory, a sustained strength beyond could lift the USD/JPY pair to the 153.00 mark en route to the 153.65 region, or the 61.8% Fibonacci retracement level. The momentum could extend further and allow spot prices to reclaim the 154.00 mark.

On the flip side, weakness below the 152.00 mark might continue to find some support near the 151.75 area or the 38.2% Fibo. level. The said area nears the overnight swing low and should now act as a key pivotal point. Some follow-through selling could make the USD/JPY pair vulnerable to weaken further below the 151.00 round figure, towards the 150.50 intermediate support before eventually dropping to the 150.00 psychological mark.

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.