The Japanese Yen (JPY) struggles to build on its modest Asian session uptick that followed the release of Japan’s wage growth data, which reaffirmed bets for an imminent rate hike by the Bank of Japan (BoJ) in December. Apart from this, the cautious market mood lends support to the safe-haven JPY. Moreover, dovish Federal Reserve (Fed)-inspired US Dollar (USD) weakness keeps the USD/JPY pair close to a three-week low touched on Friday.
Meanwhile, rising BoJ rate hike bets and fiscal concerns keep the Japanese government bond (JGB) yields close to a multi-year peak. The resultant narrowing of the rate differential between Japan and other major economies could further underpin the lower-yielding JPY. Traders, however, seem reluctant to place aggressive directional bets and opt to move to the sidelines ahead of the highly-anticipated FOMC monetary policy decision on Wednesday.
Japanese Yen bulls seem hesitant despite rising BoJ rate hike bets
- Government data showed earlier this Monday that Japan’s Nominal Wages rose 2.6% YoY in October, surpassing expectations of 2.2% and marking the strongest increase in three months. However, inflation-adjusted real wages shrank for the 10th consecutive month, by 0.7% from a year earlier, amid the 3.4% rise in consumer prices.
- This adds pressure on the Bank of Japan amid speculation that policymakers may opt for another rate hike at its December policy meeting and provides a modest lift to the Japanese Yen during the Asian session. The uptick seems unaffected by the revised Q3 GDP, showing Japan’s economy contracted faster than initially reported.
- The revised Gross Domestic Product report from the Cabinet Office revealed that Japan’s economy shrank 0.6% in the July-September period compared with the initial estimate of 0.4%. On a yearly basis, the economy contracted by 2.3%, or its fastest pace since Q3 2023, vs the forecast for a 2.0% fall and 1.8% fall reported originally.
- Investors, however, seem convinced that higher wages will increase household purchasing power and boost spending, which should fuel demand-driven inflation and bolster the economy. Furthermore, BoJ Governor Kazuo Ueda said last week that the likelihood of the economic and price projections being met is rising.
- This, along with Prime Minister Sanae Takaichi’s reflationary push and massive spending plan, lifted the benchmark 10-year Japanese government bond (JGB) yield to its strongest level since 2007 last Thursday. Moreover, 20-year and 30-year JGB yields reached levels not seen since 1999, further underpinning the JPY.
- In contrast, the CME Group’s FedWatch Tool indicates that traders are currently pricing in a nearly 90% chance that the US Federal Reserve (Fed) will lower borrowing costs again on Wednesday. This, in turn, keeps the US Dollar depressed near its lowest level since late October and exerts pressure on the USD/JPY pair.
- The USD bears, however, might refrain from placing aggressive bets and opt to wait for more cues about the Fed’s rate-cut path. Hence, the focus will remain glued to the updated economic projections, including the so-called dot plot, and Fed Chair Jerome Powell’s comments during the post-meeting press conference.
USD/JPY seems vulnerable while below 100-hour SMA pivotal hurdle
The USD/JPY pair continued with its struggle to move back above the 100-hour Simple Moving Average (SMA) on Friday, and the subsequent slide favors bearish traders. Furthermore, technical indicators on hourly charts are holding in negative territory and back the case for additional losses, though neutral oscillators on the daily chart warrant some caution. Hence, any further intraday slide could find some support near Friday’s swing low, around the 154.35 region, below which spot prices could fall to the 154.00 round figure.
On the flip side, any meaningful recovery attempt is likely to confront a stiff barrier near the 155.35 region, or the 100-hour SMA. Some follow-through buying beyond Friday’s swing high, around mid-155.00s, might trigger a short-covering move and allow the USD/JPY pair to reclaim the 156.00 mark. The momentum could extend further towards the next relevant hurdle near the 156.60-156.65 region en route to the 157.00 round figure.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.