Japanese Yen consolidates ahead of BoJ rate decision, downside seems limited
- The Japanese Yen consolidates in a range as traders seem reluctant to take action ahead of the BoJ meeting.
- Bets for an imminent BoJ rate hike and a weaker risk tone lend support to the safe-haven JPY.
- Dovish Fed expectations might keep a lid on the USD recovery and cap the upside for USD/JPY.
The Japanese Yen (JPY) stalls the previous day's decline against a broadly recovering US Dollar (USD) and oscillates in a narrow trading range during the Asian session on Thursday. The near-term bias, meanwhile, seems tilted in favor of the JPY bulls amid firming expectations for an imminent rate hike by the Bank of Japan (BoJ) this week. Traders, however, seem reluctant and opt to wait for more cues about the BoJ's future policy path. Hence, the focus will remain on the outcome of the BoJ rate decision on Friday and Governor Kazuo Ueda's post-meeting press conference.
Heading into the key central bank event risk, some repositioning trade might infuse volatility around the JPY amid worries about Japan's worsening fiscal health. That said, hawkish BoJ expectations mark a significant divergence in comparison to rising bets for more interest rate cuts by the US Federal Reserve (Fed), which keeps a lid on the attempted USD recovery and should act as a tailwind for the lower-yielding JPY. Apart from this, a generally weaker tone around the equity markets should benefit the JPY's safe-haven status and help limit any meaningful depreciating move.
Japanese Yen bulls opt to wait for the highly anticipated BoJ policy update on Friday
- Traders turn cautious and refrain from placing aggressive directional bets around the Japanese Yen ahead of the start of a two-day Bank of Japan meeting this Thursday. The central bank will announce its policy decision on Friday and is widely expected to hike interest rates to 0.75%, or a three-decade high.
- Furthermore, recent reports suggest that the BoJ would likely maintain a pledge to keep raising interest rates, but stress that the pace will depend on how the economy reacts to each hike. Hence, comments from BoJ Governor Kazuo Ueda will be looked for cues about how far the central bank could raise rates.
- Investors have been selling shorter-dated Japanese government bonds amid hawkish BoJ expectations. Adding to this, reports on the size of government spending next year fueled worries about Japan's worsening fiscal health and lifted the yield on the benchmark 10-year JGB to its highest level since June 2007.
- The resultant narrowing of the yield differential between Japan and other major economies acts as a tailwind for the Japanese Yen during the Asian session on Thursday. The US Dollar, on the other hand, preserves the overnight recovery gains and supports the USD/JPY pair heading into the key central bank event.
- The upside for the USD, however, seems limited amid dovish Federal Reserve expectations. Traders have been pricing in the possibility of two more rate cuts by the US central bank in 2026. Apart from this, speculations that the new Trump-aligned Fed chair will be dovish keep a lid on any meaningful USD appreciation.
- Traders also seem reluctant to place aggressive bets and opt to wait for the release of the latest US consumer inflation figures, due later during the North American session. The crucial data will be looked for more cues about the Fed's rate-cut path, which should provide some impetus to the USD and the USD/JPY pair.
USD/JPY needs to surpass the 156.00 mark to back the case for further appreciation
The overnight breakout through the 100-hour Simple Moving Average (SMA), along with positive oscillators on hourly and daily charts, backs the case for a further move up for the USD/JPY pair. However, it will still be prudent to wait for a sustained strength beyond the weekly high, around the 156.00 mark, before placing fresh bullish bets. Spot prices might then extend the positive momentum towards the monthly high, around the 157.00 neighborhood, touched last week, with some intermediate hurdle near the 156.55-156.60 region.
On the flip side, the 100-hour SMA resistance-turned-support, currently around the 155.30 zone, could protect the immediate downside ahead of the 155.00 psychological mark. A convincing break below the latter might prompt some technical selling and expose the 154.35-154.30 region, or the monthly swing low touched on December 5. This is followed by the 154.00 mark, which, if broken, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
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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