Japanese Yen softens on BoJ rate hike doubts, fiscal concerns, positive risk tone
- Japanese Yen meets with a fresh supply on Tuesday, though the downside remains cushioned.
- The uncertainty over the timing of the next BoJ rate hike and a positive risk tone undermine the JPY.
- Intervention fears and the divergent BoJ-Fed outlooks offer support to the lower-yielding JPY.
The Japanese Yen (JPY) drifts lower against its American counterpart during the Asian session on Tuesday and stalls the previous day's goodish recovery move from a nearly two-week low. Despite the Bank of Japan's (BoJ) hawkish outlook, investors remain uncertain about the likely timing of the next interest rate hike. This, along with fiscal concerns and a generally positive risk tone, undermines the safe-haven JPY and assists the USD/JPY pair to hold steady around mid-156.00s. However, a combination of factors warrants caution for the JPY bears, and before positioning for deeper losses.
Hawkish BoJ expectations mark a significant divergence in comparison to bets for more interest rate cuts by the US Federal Reserve (Fed). The latter might keep a lid on the USD and contribute to limiting losses for the lower-yielding JPY. Adding to this, speculations that Japanese authorities will step in to stop the domestic currency from weakening too rapidly, along with prospects for further BoJ policy tightening, act as a tailwind for the JPY. Traders might also opt to wait for the release of the US Nonfarm Payrolls (NFP) report on Friday before placing fresh directional bets around the USD/JPY pair.
Japanese Yen traders seem noncommittal amid mixed fundamental cues
- Investors seem uncertain about the pace of policy tightening by the Bank of Japan amid expectations that energy subsidies, stable rice prices, and low petroleum costs would keep inflation low into 2026. This, along with fiscal concerns due to Prime Minister Sanae Takaichi’s large-scale spending plans to stimulate growth, fail to assist the Japanese Yen to capitalize on Monday's bounce from a two-week low against the US Dollar.
- Bank of Japan Governor Kazuo Ueda said on Monday that the central bank will continue to raise interest rates if economic and price developments move in line with its forecasts. Ueda added that adjusting the degree of monetary support will help the economy achieve sustained growth, and that wages and prices are highly likely to rise together moderately. This keeps the door open for further BoJ policy normalization.
- The hawkish outlook pushed the rate-sensitive two-year Japanese government bond yield to its highest level since 1996. The yield on the benchmark 10-year JGB reached its highest point since 1999 on Monday. The resultant narrowing of the rate differential between Japan and other major economies could help limit any significant decline for the JPY amid speculations about a possible government intervention.
- Meanwhile, the US Dollar is looking to extend the previous day's retracement slide from a nearly four-week top amid rising bets for further policy easing by the Federal Reserve. In fact, traders are pricing in the possibility that the Fed will lower borrowing costs in March and maybe deliver another rate cut later this year. The bets were further reaffirmed by the mixed US PMI data for December 2025 released on Monday.
- In fact, the S&P Global US Manufacturing PMI held steady at 51.8 and indicated continued expansion. In contrast, the Institute for Supply Management's (ISM) Manufacturing PMI showed signs of persistent contraction and declined to 47.9 from 48.2 in November. This keeps the USD bulls on the defensive through the Asian session on Tuesday and further contributes to capping the upside for the USD/JPY pair.
- Traders keenly await the release of the US Nonfarm Payrolls report on Friday, which, along with this week's other important US macro data, will be looked upon for cues about the Fed's rate-cut path. This, in turn, will play a key role in determining the USD trajectory and provide a fresh directional impetus to the USD/JPY pair. Nevertheless, the broader fundamental backdrop seems tilted in favor of the JPY bulls.
USD/JPY could find support near lower end of short-term ascending channel
The ascending channel from 155.46 supports the uptrend, with the lower boundary near 156.13 cushioning pullbacks. Short-term moving averages have flattened, reflecting consolidation within the rising structure. The Moving Average Convergence Divergence (MACD) edges just above the zero line, suggesting fading bearish pressure. The RSI prints 43 (neutral), which keeps upside contained without signaling oversold conditions. A break above the channel cap at 157.16 would open the next leg higher, while failure to attract follow-through bids could drag the USD/JPY pair back toward the lower boundary of the channel.
(The technical analysis of this story was written with the help of an AI tool)
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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