The Japanese Yen (JPY) sticks to its intraday gains through the Asian session on Monday as comments from Bank of Japan (BoJ) Governor Kazuo Ueda reaffirmed bets for an imminent interest rate hike. The hawkish outlook lifts Japanese government bond (JGB) yields to their highest levels in years, narrowing the rate differential between Japan and other major economies. This, along with the cautious market mood, is seen underpinning the JPY’s safe-haven status.
The US Dollar (USD), on the other hand, drops to a nearly two-week low amid the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs again this month. This contributes to the USD/JPY pair’s downfall to the 155.50-155.45 region and backs the case for further losses. Traders now look forward to this week’s key US macro releases, scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI later today, for a fresh impetus.
Japanese Yen bulls retain control amid divergent BoJ-Fed expectations
- Bank of Japan Governor Kazuo Ueda reiterated on Monday that the central bank remains on track to raise interest rates further if prices and the economy continue to unfold as expected. The likelihood of the BoJ’s baseline scenario for growth and inflation being realised is gradually increasing, Ueda added further.
- This reaffirms market bets for a BoJ rate hike move, either in December or January, and lifts the rate-sensitive two-year Japanese government bond yield to 1% for the first time since June 2008. Moreover, the 20-year yield advances to levels not seen since November 2020 and lifts the lower-yielding Japanese Yen.
- Japan’s Ministry of Finance reported earlier today that Capital Spending rose for the third straight quarter, by 2.9% from a year earlier during the July-September quarter. This, however, marks a notable slowdown from the 7.6% rise recorded in the previous quarter, though it does little to influence the JPY.
- Japan’s Composite PMI 2025 was finalized at 52.0 for November, up from 51.5 in the previous month. This pointed to modest growth in the overall private sector due to a combination of the slower decline in factory activity, which shrank for the fifth straight month, and continued growth in services.
- Meanwhile, Japan’s Prime Minister Sanae Takaichi promises to continue fiscal management, while paying close attention to interest rate trends and other factors. This, along with the US Dollar (USD) selling bias, exerts some downward pressure on the USD/JPY pair during the Asian session.
- The recent dovish remarks by several Federal Reserve officials lifted market bets for another interest rate cut in December. This, in turn, drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, to a nearly two-week low and further weighs on the USD/JPY pair.
- Traders now look forward to the release of the US ISM Manufacturing PMI for some impetus later during the North American session. Furthermore, this week’s important US macro releases, scheduled at the start of a new month, will play a key role in influencing the USD and the USD/JPY pair.
USD/JPY remains vulnerable to test the 155.00 psychological mark
Bears now await a sustained break below the 155.40-155.35 region, representing the 100-period Simple Moving Average (SMA) on the 4-hour chart. Meanwhile, oscillators on the said chart have been gaining negative traction, though technical indicators on the daily chart are still holding in positive territory. This, in turn, suggests that the USD/JPY pair is more likely to find decent support near the 155.00 psychological mark. Some follow-through selling, however, will confirm a breakdown and set the stage for an extension of a one-week-old downtrend.
On the flip side, any meaningful recovery attempt might now confront an immediate hurdle ahead of the 156.00 round figure. A sustained strength beyond could trigger a short-covering move towards the 156.65-156.70 region, above which the USD/JPY pair could reclaim the 157.00 mark. The momentum could extend further toward the 157.45-157.50 intermediate hurdle en route to the multi-month high, around the 158.00 neighborhood, touched in November.
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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