Japanese Yen extends gains vs bearish USD amid hawkish BoJ stance, dovish Fed outlook
- The Japanese Yen scales higher against a bearish USD for the second straight day on Thursday.
- The divergent BoJ-Fed policy outlooks turn out to be a key factor benefiting the lower-yielding JPY.
- Japan’s fiscal and growth concerns could cap the upside for the JPY amid a positive risk tone.
The Japanese Yen (JPY) builds on the previous day's strong move up against a broadly weaker US Dollar (USD) and gains some follow-through positive traction for the second straight day on Thursday. A shift in rhetoric from Bank of Japan (BoJ) Governor Kazuo Ueda, saying that the central bank is drawing closer to sustainably achieving the 2% annual inflation target, lifted bets for an imminent rate hike as early as next week. This marks a significant divergence in comparison to the US Federal Reserve's (Fed) dovish rate cut on Wednesday, which is seen undermining the Greenback and turning out to be a key factor behind the JPY's relative outperformance.
Meanwhile, expanded fiscal spending under Prime Minister Sanae Takaichi’s administration has exacerbated concerns about Japan's public finances. This, along with a generally positive tone around the equity markets, could act as a headwind for the safe-haven JPY. Bullish traders might also refrain from placing aggressive bets around the JPY and opt to wait for more cues about the BoJ's policy tightening path. Hence, the focus remains on the outcome of the December 18-19 BoJ policy meeting, which will influence the near-term JPY price dynamics. Heading into the key central bank event risk, the fundamental backdrop might continue to support the JPY.
Japanese Yen continues to draw some support from hawkish BoJ expectations
- Bank of Japan Governor Kazuo Ueda reiterated earlier this week that the likelihood of the central bank's baseline economic and price outlook materialising had been gradually increasing.
- Moreover, Wednesday's release of the Corporate Goods Price Index indicated that inflation in Japan remains above the historic levels and backs the case for a further BoJ policy normalization.
- The market is now actively pricing in the possibility of a BoJ rate hike as early as next week, which marks a big divergence in comparison to the US Federal Reserve's dovish interest rate cut.
- The US central bank, in a widely expected move, lowered interest rates at the end of a two-day meeting on Wednesday and projected one more quarter-percentage-point rate cut in 2026.
- Meanwhile, Fed Chair Jerome Powell told reporters that the US labor market has significant downside risks and that the central bank does not want its policy to push down on job creation.
- Traders were quick to react and are now pricing in two more rate cuts by the Fed in 2026. This keeps the US Dollar depressed and continues to underpin the lower-yielding Japanese Yen.
- Investors remain worried about Japan's deteriorating fiscal condition amid Prime Minister Sanae Takaichi's reflationary push and massive spending plan to boost sluggish economic growth.
- In fact, the revised Gross Domestic Product report showed that Japan's economy shrank 0.6% in the July-September period and by 2.3% on a yearly basis, or its fastest pace since Q3 2023.
- This, however, was offset by expectations that higher wages will increase household purchasing power and boost spending, which should fuel demand-driven inflation and bolster the economy.
- Traders now look to the release of the usual US Weekly Initial Jobless Claims, which, along with the US Trade Balance data, could provide some impetus to the USD and the USD/JPY pair.
USD/JPY could find support near the descending channel hurdle breakpoint, around 155.35
An intraday breakdown below the 156.00 mark and the 100-hour Simple Moving Average (SMA) backs the case for further losses amid negative oscillators on hourly charts. That said, technical indicators on the daily chart are holding in positive territory and suggest that any further decline is more likely to attract some buyers near the 155.35-155.30 hurdle breakpoint. The latter represented the top boundary of a short-term trading range and should act as a key pivotal point. Some follow-through selling, leading to a subsequent fall below the 155.00 psychological mark, might shift the near-term bias in favor of the USD/JPY bears.
On the flip side, a sustained strength back above the 156.00 mark could lift spot prices to the 156.60-156.65 region en route to the 157.00 neighborhood, or a two-week high touched on Tuesday. Some follow-through buying should pave the way for additional gains. The USD/JPY pair might then surpass the 157.45 intermediate hurdle and aim towards challenging a multi-month peak, around the 158.00 neighborhood, touched in November.
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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