The Japanese Yen (JPY) edges higher during the Asian session on Thursday and recovers slightly from a nine-month trough touched against its American counterpart the previous day. Comments from Bank of Japan (BoJ) Governor Kazuo Ueda, saying that the underlying inflation is gradually accelerating toward the 2% goal, keep hopes alive for an imminent rate hike. Adding to this, speculations that Japanese authorities could intervene to stem further weakness in the domestic currency offer some support to the JPY.
Traders, however, remain uncertain about the BoJ’s policy tightening plan amid Japan’s Prime Minister Sanae Takaichi’s pro-stimulus stance. This, along with the optimism led by a positive development to reopen the US federal government, should cap any meaningful upside for the safe-haven JPY. The US Dollar (USD), on the other hand, struggles to lure buyers amid Federal Reserve (Fed) rate cut bets and concerns that the longest US government shutdown could affect the economy, warranting caution for the USD/JPY bulls.
Japanese Yen bears turn cautious amid intervention fears; not out of the woods yet
- Bank of Japan (BoJ) Governor Kazuo Ueda said on Thursday that the central bank strives to achieve moderate inflation backed by wage growth by helping improve the economy. Ueda pointed to resilient consumption driven by stronger household incomes and improving labour-market conditions, and also noted that underlying inflation is gradually accelerating toward the BoJ’s 2% goal.
- Japan’s Prime Minister Sanae Takaichi said on Wednesday that the government and the BoJ will continue to work together to develop the national economy. Takaichi had pledged to continue former Premier Shinzo Abe’s policy mix – Abenomics – and called on the BoJ to fully cooperate with the government. This signals her administration’s preference for interest rates to stay low.
- Japan’s Finance Minister Satsuki Katayama noted that the BoJ will guide policy to sustainably and stably achieve 2% inflation target. The government will pursue responsible fiscal policy to avoid a free fall in the JPY, which will push up import costs and cause inflation unseen in the past, Katayama added. On Wednesday, Katayama said that she will be watching FX moves with a high sense of urgency.
- The US Senate has passed the funding bill to end the longest-running government shutdown, boosting investors’ confidence and triggering a fresh wave of the global risk-on trade. The US Dollar bulls, however, remain on the back foot amid concerns about weakening economic momentum on the back of the US government closure and bets for more rate cuts by the Federal Reserve.
- According to the CME Group’s FedWatch Tool, traders are pricing in a 60% probability that the US central bank will lower borrowing costs by a 25-basis-point in December. The expectations were reaffirmed by the recent US data, which indicated notable job losses in October. Moreover, consumer sentiment fell to a 3½-year low in early November, reaffirming dovish Fed expectations.
- This marks a significant divergence in comparison to the BoJ’s signal that the next interest rate increase could come as soon as December. This, along with intervention fears, is holding back traders from placing fresh bearish bets around the Japanese Yen and acting as a headwind for the USD/JPY pair. Investors will continue to take cues from speeches from FOMC members later this Thursday.
USD/JPY bulls have the upper hand while above 154.45-154.50 horizontal resistance breakpoint
From a technical perspective, Wednesday’s breakout through the 154.45-154.50 supply zone was seen as a fresh trigger for the USD/JPY bulls. Moreover, oscillators on the daily chart are holding in positive territory and back the case for additional gains. A sustained strength beyond the 155.00 psychological mark will reaffirm the constructive outlook and lift spot prices towards the 155.60-155.65 intermediate hurdle en route to the 156.00 round figure.
On the flip side, any corrective pullback below the 154.50-154.45 resistance breakpoint could be seen as a buying opportunity near the 154.00 mark. A convincing break below the said handle, however, might prompt some technical selling and drag the USD/JPY pair to the 153.60-153.50 intermediate support. Spot prices could decline further towards the 153.00 round figure, which, if broken, should pave the way for a further weakness towards the 152.15-152.10 region.
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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