- The Japanese Yen edges higher in reaction to an upward revision of Japan’s Q3 GDP.
- The recent decline in the US bond yields undermines the USD and also benefits the JPY.
- Doubts over the BoJ’s ability to hike interest rates further cap the upside for the JPY.
The Japanese Yen (JPY) continues with its struggle to gain any meaningful traction and oscillates in a familiar range against its American counterpart during the Asian session on Monday. The initial reaction to an upward revision of Japan’s GDP print for the third quarter turned out to be limited amid doubts over whether the Bank of Japan (BoJ) will hike interest rates further in December. This, along with a modest US Dollar (USD) uptick, acts as a tailwind for the USD/JPY pair.
That said, geopolitical tensions, along with concerns about US President-elect Donald Trump’s impending trade tariffs and the recent decline in the US Treasury bond yields, offer some support to the safe-haven JPY. Meanwhile, the mixed fundamental backdrop warrants caution for aggressive traders. Investors now look to the US consumer inflation figures this week for cues about the Federal Reserve’s (Fed) rate cut path, which should provide a fresh impetus to the USD/JPY pair.
Japanese Yen traders remain on the sidelines amid mixed fundamental cues
- Japan’s third-quarter GDP was revised to show a 0.3% growth as compared to the 0.2% estimated originally. On a yearly basis, the economy expanded by 1.2%, above prior estimates of 0.9%.
- The yearly rate marks a sharp slowdown from the 2.2% rise in the prior quarter, while sluggish private consumption suggests that the boost from bumper wage hikes is running out of steam.
- This, in turn, raises doubts over whether the Bank of Japan has enough headroom to raise interest rates further and fails to assist the Japanese Yen to build on a modest intraday uptick on Monday.
- The US Nonfarm Payrolls (NFP) report released on Friday revealed that the economy added 227K jobs in November against the previous month’s upwardly revised 36K and 200K anticipated.
- Additional details of the report showed that the Unemployment Rate edged up to 4.2% in November from 4.1%, as expected, and the Average Hourly Earnings held steady at 4% vs 3.9% forecasted.
- The crucial jobs data reaffirmed market expectations that the Federal Reserve is unlikely to pause in its easing cycle and lower borrowing costs again at its upcoming policy meeting in December.
- The University of Michigan’s preliminary gauge of US consumer sentiment rose to 74.0 in December reading from 71.8 while one-year inflation expectations rose to 2.9% from 2.6% in November.
- Cleveland Fed President Beth Hammack noted that the economic landscape calls for modestly restrictive policy, though the market view of one cut between now and late January is reasonable.
- San Francisco Fed President Mary Daly said that the labor market remains in a good position and that the central bank will still step in with additional rate hikes if price growth begins to spiral once again.
- Chicago Fed President Austan Goolsbee stated that the overall progress on inflation is still encouraging and any pause in the rate-cutting would come if conditions in inflation or the labor market change.
- Fed Governor Michelle Bowman said that she prefers to cut the interest rates cautiously and emphasized that the underlying inflation remains uncomfortably above the central bank’s 2% goal.
- The yield on the benchmark 10-year US government bond hangs near its lowest level since October 21, capping the US Dollar recovery from a multi-week low and supporting the lower-yielding JPY.
USD/JPY technical setup remains tilted in favor of bearish traders
From a technical perspective, the range-bound price action could be categorized as a bearish consolidation phase against the backdrop of the recent pullback from a multi-month top touched in November. Moreover, oscillators on the daily chart are holding in negative territory and suggest that the path of least resistance for the USD/JPY pair is to the downside. That said, last week’s resilience below the 100-day Simple Moving Average (SMA) warrants some caution for bearish traders.
In the meantime, the post-NFP low, around the 149.35 area, now seems to act as immediate support ahead of the 149.00 mark and the 100-day SMA, currently pegged near the 148.70-148.65 region. The latter coincides with a nearly two-month low touched last Tuesday and should act as a key pivotal point. Some follow-through selling could drag the USD/JPY pair to the 148.10-148.00 region en route to the 147.35-147.30 zone and the 147.00 round figure.
On the flip side, attempted recovery might now confront some resistance near the 150.55 region. This is followed by the 150.70 hurdle, the 151.00 round figure and last week’s swing high, around the 151.20-151.25 zone. A sustained move beyond the latter should allow the USD/JPY pair to test the very important 200-day SMA near the 152.00 mark. Some follow-through buying will suggest that the corrective decline from a multi-month high has run its course and shift the bias in favor of bullish traders.
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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