The Japanese Yen (JPY) extends its sideways consolidative price move through the Asian session on Thursday as traders opt to move to the sidelines ahead of the key central bank event risk. The Bank of Japan (BoJ) is scheduled to announce its decision at the end of a two-day policy meeting on Friday and is widely expected to hike interest rates. The focus, however, will be on BoJ Governor Kazuo Ueda’s post-meeting press conference, which will be scrutinized for cues about the future policy path and provide a fresh directional impetus to the JPY.
Heading into the key central bank event risk, some repositioning trade might infuse volatility around the JPY amid worries about Japan’s worsening fiscal health. That said, hawkish BoJ expectations mark a significant divergence in comparison to bets for more rate cuts by the US Federal Reserve (Fed), which keeps a lid on the attempted USD recovery and acts as a tailwind for the lower-yielding JPY. Apart from this, a generally weaker tone around the equity markets benefits the JPY’s safe-haven status and warrants some caution for bearish traders.
Japanese Yen traders seem non-committed ahead of the crucial BoJ rate decision on Friday
- Traders turn cautious and refrain from placing aggressive directional bets around the Japanese Yen ahead of the start of a two-day Bank of Japan meeting this Thursday. The central bank will announce its policy decision on Friday and is widely expected to hike interest rates to 0.75%, or a three-decade high.
- Furthermore, recent reports suggest that the BoJ would likely maintain a pledge to keep raising interest rates, but stress that the pace will depend on how the economy reacts to each hike. Hence, comments from BoJ Governor Kazuo Ueda will be looked for cues about how far the central bank could raise rates.
- Investors have been selling shorter-dated Japanese government bonds amid hawkish BoJ expectations. Adding to this, reports on the size of government spending next year fueled worries about Japan’s worsening fiscal health and lifted the yield on the benchmark 10-year JGB to its highest level since June 2007.
- The resultant narrowing of the yield differential between Japan and other major economies acts as a tailwind for the Japanese Yen during the Asian session on Thursday. The US Dollar, on the other hand, preserves the overnight recovery gains and supports the USD/JPY pair heading into the key central bank event.
- The upside for the USD, however, seems limited amid dovish Federal Reserve expectations. Traders have been pricing in the possibility of two more rate cuts by the US central bank in 2026. Apart from this, speculations that the new Trump-aligned Fed chair will be dovish keep a lid on any meaningful USD appreciation.
- Traders also seem reluctant to place aggressive bets and opt to wait for the release of the latest US consumer inflation figures, due later during the North American session. The crucial data will be looked for more cues about the Fed’s rate-cut path, which should provide some impetus to the USD and the USD/JPY pair.
USD/JPY bulls await sustained strength above the 156.00 mark before placing fresh bets
The overnight breakout through the 100-hour Simple Moving Average (SMA), along with positive oscillators on hourly and daily charts, backs the case for a further move up for the USD/JPY pair. However, it will still be prudent to wait for a sustained strength beyond the weekly high, around the 156.00 mark, before placing fresh bullish bets. Spot prices might then extend the positive momentum towards the monthly high, around the 157.00 neighborhood, touched last week, with some intermediate hurdle near the 156.55-156.60 region.
On the flip side, the 100-hour SMA resistance-turned-support, currently around the 155.30 zone, could protect the immediate downside ahead of the 155.00 psychological mark. A convincing break below the latter might prompt some technical selling and expose the 154.35-154.30 region, or the monthly swing low touched on December 5. This is followed by the 154.00 mark, which, if broken, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
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.