Japanese Yen remains on the front foot amid rising BoJ rate hike bets and softer risk tone
- The Japanese Yen scales higher for the second straight day amid a combination of supporting factors.
- Firming BoJ rate hike expectations and the cautious market mood drive flows to the safe-haven JPY.
- Dovish Fed expectations keep the USD bulls on the defensive and further weigh on the USD/JPY pair.
The Japanese Yen (JPY) climbs to a one-and-a-half-week top against a broadly weaker US Dollar (USD) during the Asian session on Tuesday and seems poised to appreciate further. Market participants seem convinced that the Bank of Japan (BoJ) will raise interest rates this week. This, along with a generally weaker tone around the equity markets, contributes to the safe-haven JPY's outperformance for the second straight day. This also marks the fourth day of a positive move for the JPY in the previous five, though bulls seem reluctant to place aggressive bets ahead of the key central bank event risk.
Moreover, worries about Japan's deteriorating fiscal condition, on the back of Prime Minister Sanae Takaichi's massive spending plan, might hold back the JPY bulls from placing fresh bets. The US Dollar (USD), on the other hand, struggles near a two-month low, touched on Monday, amid rising bets for more interest rate cuts by the US Federal Reserve (Fed). This marks a significant divergence in comparison to hawkish BoJ expectations, which, in turn, validates the near-term positive outlook for the lower-yielding JPY and backs the case for an extension of a one-week-old downtrend for the USD/JPY pair.
Japanese Yen remains well supported by hawkish BoJ bets and safe-haven demand
- Traders ramped up their bets for an imminent Bank of Japan rate hike following Governor Kazuo Ueda's comments last week, saying that the likelihood of the central bank's baseline economic and price outlook materialising had been gradually increasing.
- Moreover, a quarterly survey of major Japanese manufacturers released on Monday showed that business sentiment improved to its best level in four years. This backs the case for further BoJ policy tightening and continues to underpin the Japanese Yen.
- Meanwhile, private-sector surveys released this Tuesday showed that Japan's manufacturing activity contracted at a slower pace and the service sector lost some steam in December. This, however, does little to dent the bullish sentiment around the JPY.
- The defensive mood keeps Asian equity markets under pressure amid valuation concerns and fears of the AI bubble burst. This is seen as another factor benefiting the JPY's safe-haven status and weighing on the USD/JPY pair amid a bearish US Dollar.
- Despite the Federal Reserve's cautious outlook, traders are pricing in the possibility of two more rate cuts in 2026. This, in turn, keeps the USD Index (DXY), which tracks the Greenback against a basket of currencies, depressed near its lowest level in over two months.
- Moreover, expectations for a dovish replacement of Fed Chair Jerome Powell weigh on the USD and drag the USD/JPY pair below the 155.00 psychological mark. Traders, however, might opt to wait for important US macro data and the central bank event risk.
- This week's busy US economic docket features the delayed Nonfarm Payrolls (NFP) report for October, due later during the North American session. This, along with the flash US PMIs, might influence the USD and provide a fresh impetus to the USD/JPY pair.
- The market attention will then shift to the latest US consumer inflation figures on Thursday, which will be looked for more cues about the Fed's future rate-cut path and drive the USD. Nevertheless, the divergent BoJ-Fed policy expectations favor the JPY bulls.
USD/JPY seems vulnerable to retest the monthly swing low, around the 155.35-155.30 region
The recent repeated failures near the 100-hour Simple Moving Average (SMA) and a subsequent breakdown below the 155.00 mark favor the USD/JPY bears. Moreover, negative oscillators on hourly/daily charts back the case for a further near-term depreciating move towards the monthly swing low, around the 154.35 region. This is followed by the 154.00 round figure, which, if broken decisively, should pave the way for a further near-term depreciating move.
On the flip side, any meaningful recovery attempted might now confront an immediate hurdle near the 155.40-155.45 region, above which the USD/JPY pair could aim to challenge the 100-hour SMA, currently pegged around the 156.00 mark. Some follow-through buying might trigger a short-covering move and lift spot prices to the 157.00 neighborhood, or the monthly swing high, 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.
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