Japanese Yen pulls back after touching nearly one-month high against USD
- The Japanese Yen ticks lower and erodes a part of its strong weekly gains against the USD.
- Rising bets for a BoJ rate hike next week should help limit any meaningful JPY depreciation.
- Expectations that the Fed will cut rates further undermine the USD and should cap USD/JPY.
The Japanese Yen (JPY) attracts some intraday sellers after touching a nearly one-month top against its American counterpart during the Asian session on Friday. Any meaningful JPY depreciation, however, seems elusive in the wake of rising bets that the Bank of Japan (BoJ) will hike interest rates again next week. The expectations were reaffirmed by the recent remarks from BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino. This, along with a softer risk tone, favors the JPY bulls.
Meanwhile, signs of abating inflation in the US suggest that the Federal Reserve (Fed) may not exclude the possibility of rate cuts by the end of this year. This led to a sharp decline in the US Treasury bond yields since early this week and the resultant narrowing of the US-Japan yield differential could underpin the JPY. Moreover, the Fed's rate cut outlook keeps the US Dollar (USD) depressed near a one-week low and should further contribute to capping the USD/JPY pair's attempted recovery move.
Japanese Yen bulls have the upper hand amid firming BoJ rate hike expectations
- Bank of Japan Governor Kazuo Ueda reiterated on Thursday that the central bank will raise the policy rate this year if economic, and price conditions continue to improve.
- Earlier this week, BoJ Deputy Governor Ryozo Himino said that a rate hike will be discussed at next week's meeting as prospects of sustained wage gains heighten.
- Data released on Thursday showed that producer prices in Japan increased for the 46th consecutive month and came in at the 3.8% YoY rate for December 2024.
- This comes on top of a decline in Japan's real wages and household spending for the fourth month in November, pointing to broadening inflationary pressures.
- Markets now see about a 79% chance of a 25-basis-point increase at the end of the January 23-24 meeting, which might continue to underpin the Japanese Yen.
- Meanwhile, the softer US Producer Price Index and Consumer Price Index (CPI) released this week suggested that the underlying inflation slowed last month.
- This, in turn, fueled speculations that the Federal Reserve may not necessarily exclude the possibility of cutting interest rates further by the end of this year.
- The US Commerce Department reported that Retail Sales increased 0.4% in December and the previous month's reading was revised higher to show a 0.8% gain.
- Moreover, the Philly Fed's Manufacturing Index surpassed even the most optimistic estimates and surged to the highest level since April 2021, to 44.3 this month.
- Separately, data published by the US Labor Department showed that Initial Jobless Claims rose more-than-expected, to 217,000 during the week ended January 11.
- Fed Governor Christopher Waller said on Thursday that inflation is likely to continue to ease and allow the US central bank to cut rates sooner and faster than expected.
- Waller added that as many as three or four quarter-percentage-point rate reductions could still be possible this year, dragging the US Treasury bond yields lower.
- The Fed, however, might still adopt a more cautious approach towards cutting interest rates in 2025 on the back of the still resilient US economy and labor market.
USD/JPY might struggle to capitalize on intraday recovery beyond 156.00
From a technical perspective, sustained break and acceptance below the 155.00 psychological mark could drag the USD/JPY pair towards the 154.60-154.55 region, representing the lower boundary of a multi-month-old ascending channel. Some follow-through selling will be seen as a fresh trigger for bearish traders and make spot prices vulnerable to accelerate the slide to the 154.00 mark en route to the next relevant support near the 153.35-153.30 horizontal zone.
On the flip side, attempted recovery might now confront stiff resistance near the 156.00 mark ahead of the 156.30-156.35 horizontal zone. The next relevant hurdle is pegged near the 156.65-156.70 region, above which the USD/JPY pair could aim to reclaim the 157.00 round figure. The subsequent move-up could lift spot prices further to the 157.40-157.45 intermediate barrier en route to the 158.00 mark and the 158.85 region, or a multi-month top touched last week.
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.