Japanese Yen builds on intraday positive move; USD/JPY retreats further from multi-month top

0 0
  • The Japanese Yen strengthens in reaction to strong wage growth data from Japan. 
  • The uncertainty over the likely timing of the next BoJ rate hike might cap the JPY.
  • Hawkish Fed, and elevated US bond yields lend some support to the USD/JPY pair.

The Japanese Yen (JPY) gains some positive traction following the release of stronger wage growth data from Japan earlier this Thursday and for now, seems to have snapped a three-day losing streak against its American counterpart. Moreover, talks that large Japanese firms are likely to increase wages by about 5% on average in 2025 and broadening inflationary pressures back the case for another rate hike by the Bank of Japan (BoJ). Apart from this, the cautious market mood, persistent geopolitical risks and concerns about US President-elect Donald Trump’s tariff plans underpin the safe-haven JPY. 

Meanwhile, the flight to safety triggers a modest pullback in the US Treasury bond yields, which keeps the US Dollar (USD) bulls on the defensive and contributes to driving flows towards the lower-yielding JPY. That said, skepticism about the likely timing of when the BoJ will hike interest rates again might hold back the JPY bulls from placing aggressive bets. Investors might also opt to wait for the release of the US Nonfarm Payrolls (NFP) report on Friday, which will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the USD/JPY pair. 

Japanese Yen is underpinned by reviving BoJ rate hike bets; upside potential seems limited

  • Government data released this Thursday showed that base salary, or regular pay, in Japan rose 2.7% in November, marking the fastest increase since 1992, while overtime pay grew 1.6% from a revised 0.7% gain in October.
  • Meanwhile, inflation-adjusted real wages fell for the fourth consecutive month, by 0.3% in November. The inflation rate the ministry uses for wage calculation accelerated from 2.6% in October to 3.4% from a year earlier. 
  • The Bank of Japan has repeatedly said sustained, broad-based wage hikes are a prerequisite for pushing up borrowing costs and the data support prospects for a further rate hike, providing a modest lift to the Japanese Yen.
  • Investors, however, seem convinced that the BoJ will not pull the trigger at its next monetary policy meeting in January and wait until March amid the uncertainty over US President-elect Donald Trump’s protectionist policies.
  • CNN reported on Wednesday, citing unnamed sources familiar with the matter, that Trump is considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries.
  • The yield on the benchmark 10-year US government bond shot to its highest level since April 25 in reaction to the news, which, to a larger extent, overshadowed mixed labor market data released from the US on Wednesday. 
  • The Automatic Data Processing (ADP) reported that US private sector employment rose by 122,000 in December as compared to the 146,000 increase recorded in November and below the market expectation of 140,000.
  • Separately, the US Department of Labor reported that the number of Americans filing new applications for unemployment benefits fell to an 11-month low of 201K in the week ending January 4, pointing to a stable labor market.
  • Furthermore, the Minutes of the December 17-18 FOMC meeting revealed that policymakers were in favor of slowing the pace of rate cuts amid concerns about slower progress on curbing the pace of inflation toward the 2% target.
  • Fed Governor Christopher Waller said that inflation should continue to fall and make further progress towards the 2% target, which should allow the US central bank to further reduce interest rates, though at an uncertain pace.
  • Investors will continue to take cues from speeches by a slew of influential FOMC members later this Thursday, though the focus will remain glued to the closely-watched US Nonfarm Payrolls (NFP) report on Friday. 

USD/JPY technical setup favors bullish traders, 157.55-157.50 pivotal support holds the key

From a technical perspective, any subsequent slide is likely to attract some dip-buying near the 157.55-157.50 horizontal zone. Some follow-through selling, however, could make the USD/JPY pair vulnerable to accelerate the fall further towards the 157.00 mark en route to the next relevant support near the 156.75 region and the weekly low, around the 156.25-156.20 area. This is followed by the 156.00 mark, which if broken decisively might shift the bias in favor of bearish traders. 

On the flip side, the 158.55 region, or the multi-month top touched on Wednesday, now seems to act as an immediate hurdle. A sustained strength beyond could lift the USD/JPY pair to the 159.00 mark. The momentum could extend further towards the 159.45 intermediate hurdle before spot prices aim to reclaim the 160.00 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.

Read the full article here

Leave A Reply

Your email address will not be published.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More

Privacy & Cookies Policy