- The Japanese Yen drifts lower against its American counterpart for the sixth straight day.
- Expectations that the BoJ will keep rates steady this week continue to weigh on the JPY.
- Elevated US bond yields contribute to driving flows away from the lower-yielding JPY.
The Japanese Yen (JPY) continues losing ground against its American counterpart on Monday and drops to a three-week low during the Asian session. Despite the better-than-expected release of Core Machinery Orders and flash Manufacturing PMI from Japan, expectations that the Bank of Japan (BoJ) will not raise interest rates later this week continue to undermine the JPY. Furthermore, bets for a less dovish Federal Reserve (Fed) remain supportive of elevated US Treasury bond yields, which turn out to be another factor undermining the lower-yielding JPY.
That said, persistent geopolitical risks stemming from the protracted Russia-Ukraine war and the ongoing conflicts in the Middle East, along with concerns about US President-elect Donald Trump’s tariff plans, could offer support to the safe-haven JPY. Traders might also refrain from placing aggressive directional bets ahead of this week’s key central bank event risks. The Fed is scheduled to announce its decision at the end of a two-day meeting on Wednesday, which will be followed by the crucial BoJ meeting on Thursday. Investors will look for cues about the interest rate outlook in the US and Japan, which, in turn, will determine the near-term trajectory for the USD/JPY pair.
Japanese Yen selling bias remains unabated amid BoJ rate hike skepticism
- Government data released earlier this Monday showed that Japan’s core machinery orders rose 2.1% in October and registered a strong growth of 5.6% on a year-on-year basis.
- The au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) improved to 49.5 in December, though remained in contraction territory for the seventh straight month.
- Meanwhile, the gauge for the services sector rose to 51.4 in December from 50.5, while the composite PMI stood at 50.8 during the reported month, up from 50.1 in November.
- This comes after the Bank of Japan’s Tankan survey showed on Friday that business confidence at Japan’s large manufacturers improved during the three months to December.
- Moreover, expectations that consumer prices in Japan will remain above the BoJ’s 2% target, a moderately expanding economy and a rise in wages give the BoJ reason to hike rates.
- Investors, however, remain sceptical regarding the BoJ’s intention to tighten its monetary policy further, which continues to exert downward pressure on the Japanese Yen on Monday.
- The yield on the benchmark 10-year US government bond rose to a three-week high on Friday amid rising bets that the Federal Reserve will adopt a cautious stance on cutting rates.
- According to the CME Group’s FedWatch Tool, traders are pricing in over a 93% chance that the US central bank will lower borrowing costs again, by 25 basis points on Wednesday.
- However, signs that the progress in lowering inflation toward the US central bank’s 2% target has stalled raised the possibility of a slower pace of interest rate reductions next year.
- Monday’s US economic docket features the release of the flash Manufacturing and Services PMIs, along with the Empire State Manufacturing Index, later during the US session.
- That said, the market focus remains glued to the crucial FOMC and the BoJ meetings this week, which will help in determining the near-term trajectory for the USD/JPY pair.
USD/JPY move above 61.8% Fibo. level sets the stage for additional gains
From a technical perspective, a sustained move and acceptance above the 61.8% Fibonacci retracement level of the November-December fall from a multi-month peak could be seen as a fresh trigger for bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and suggest that the path of least resistance for the USD/JPY pair remains to the upside. Hence, some follow-through strength towards the next relevant hurdle, around the 154.55 region, en route to the 155.00 psychological mark, looks like a distinct possibility.
On the flip side, the Asian session low, around the 153.35-153.30 area, now seems to act as an immediate strong support ahead of the 153.00 mark. A convincing break below the latter might expose the very important 200-day Simple Moving Average (SMA) pivotal support near the 152.10-152.00 region. A convincing break below the latter might shift the bias in favor of bearish traders and drag the USD/JPY pair towards the 151.00 round figure en route to the 150.00 psychological mark.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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