USD/JPY declines on firmer Yen despite strong US economic data

• The US Dollar finds support from stronger-than-expected US macroeconomic indicators
• The Japanese Yen strengthens following firm comments from Japanese authorities on the FX market
• USD/JPY trades around 156.40, down about 0.40% on Tuesday

USD/JPY trades around 156.40 on Tuesday at the time of writing, down 0.40% on the day. The pair remains under pressure despite a US Dollar (USD) supported by a string of better-than-expected US data, as the move is largely offset by renewed strength in the Japanese Yen (JPY).

On the US side, the US Dollar benefits from robust macroeconomic data that confirm the resilience of the United States (US) economy. The US Bureau of Economic Analysis reports that the economy expanded at an annualized rate of 4.3% in the third quarter, well above the previous estimate of 3.3% and market expectations of 3.8%. Inflation components of the report also surprise to the upside, with the GDP Price Index rising 3.7% in the third quarter and Core Personal Consumption Expenditures increasing 2.9%, highlighting persistent price pressures.

Labor market indicators also contribute to the US Dollar’s strength. The ADP Employment Change report shows private sector job growth remains contained, reinforcing the view of a still-tight labor market despite signs of moderation. Industrial Production edges down 0.1% MoM in October, missing expectations but not enough to challenge confidence in the broader economic outlook. At the same time, US Conference Board Consumer Confidence falls in December to 89.1 from 92.9 previously, pointing to some softening in household sentiment amid high interest rates and ongoing inflation concerns.

Despite this fundamental support for the US Dollar, USD/JPY moves lower, weighed down by a firmer Japanese Yen (JPY). Japan’s currency rebounds on expectations of potential intervention by Japanese authorities in response to the rapid depreciation of the JPY. Japan’s Finance Minister, Satsuki Katayama, says the government has full freedom to act against excessive moves in the foreign exchange market and will take appropriate action if necessary. These remarks trigger profit-taking on short JPY positions, even though many investors believe the impact of such warnings could be short-lived without stronger fundamental backing.

From a monetary policy perspective, the stance of the Bank of Japan (BoJ) continues to limit the Japanese Yen’s upside potential. After raising its policy rate by 25 basis points to 0.75%, the BoJ maintains a cautious tone and provides no clear guidance on the timing of further rate hikes. Former Bank of Japan board member Makoto Sakurai says the next rate increase could come around the middle of next year, while warning that additional tightening may become more difficult thereafter.

Against this backdrop, USD/JPY remains caught between support from solid US fundamentals and a firmer Japanese Yen driven by intervention risks and the Bank of Japan’s cautious approach, keeping the pair modestly lower on the session.