The Japanese Yen (JPY) edges higher during the Asian session on Tuesday and recovers a part of the overnight losses against its American counterpart amid speculations that authorities would step in to stem further weakness in the domestic currency. Apart from this, mixed signals from Federal Reserve (Fed) officials keep the US Dollar (USD) depressed below its highest level since late May, which turns out to be another factor exerting some pressure on the USD/JPY pair.
Meanwhile, Japan’s ailing fiscal position and the uncertainty over the Bank of Japan’s (BoJ) policy tightening path might hold back the JPY bulls from placing aggressive bets. Furthermore, a positive risk tone might contribute to capping the upside for the safe-haven JPY. Traders might also opt to wait for this week’s key US macro releases, starting with the Producer Price Index (PPI) and Retail Sales later today, before positioning for the next leg of a directional move.
Japanese Yen edges higher as intervention fears counter BoJ rate hike uncertainty
- Japan’s Finance Minister Satsuki Katayama, in the strongest warning to date, said on Friday that we will take appropriate action as needed against excess volatility and disorderly market moves, and also signaled chances of intervention. Furthermore, Takuji Aida, a member of a key government panel, said on Sunday that Japan can actively intervene in the currency market to mitigate the negative economic impact of a weak JPY.
- Japan’s cabinet approved a lavish ¥21.3 trillion economic stimulus package last week – the biggest since COVID-19 – and further amplified concerns about the nation’s worsening fiscal position. The cabinet plans to approve a supplementary budget to fund the package as early as November 28. This fuels worries about the supply of new government debt and lifted the yield on super-long Japanese government bonds to a record high.
- Moreover, data released last week showed that Japan’s economy contracted in Q3 for the first time in six quarters, which could put pressure on the Bank of Japan to delay raising interest rates. However, BoJ Governor Kazuo Ueda left the door open for a December rate hike and told the parliament that a weak JPY could push up broader prices. Inflation in Japan has remained above the BoJ’s 2% target for well over three years.
- In contrast, US Federal Reserve Governor Christopher Waller said on Monday that available data showed the US job market remains weak enough to warrant another quarter-point rate cut at the December policy meeting. This follows New York Fed President John Williams’ remarks last Friday, describing the current policy as modestly restrictive and saying that the central bank can still cut interest rates in the near term.
- Traders were quick to react and are now pricing in around 80% chances that the Fed will lower borrowing costs at the end of a two-day meeting on December 10. This, in turn, keeps a lid on the recent US Dollar rally to its highest level since late May and acts as a headwind for the USD/JPY pair. The fundamental backdrop, however, seems tilted in favor of the JPY bears and backs the case for further upside for the currency pair.
- Investors now look forward to the delayed release of the US Producer Price Index (PPI) and monthly Retail Sales figures, due later during the North American session. Tuesday’s US economic docket also features the release of Pending Home Sales and Richmond Manufacturing Index. This, in turn, will play a key role in influencing the USD price dynamics and producing short-term trading opportunities around the USD/JPY pair.
USD/JPY technical setup backs the case for the emergence of dip-buying at lower levels
From a technical perspective, traders might now wait for acceptance above the 157.00 mark before placing fresh bullish bets around the USD/JPY pair. The subsequent move up could lift spot prices to the 157.45-157.50 intermediate hurdle en route to the 157.85-157.90 region, or a ten-month peak touched last week. Some follow-through buying beyond the 158.00 round figure will mark a fresh breakout and pave the way for a further near-term appreciating move.
On the flip side, any meaningful corrective slide might now find some support near the 156.25-156.20 zone. This is followed by the 156.00 mark, below which the USD/JPY pair could fall to the 155.45-155.40 intermediate support before dropping to the 155.00 psychological mark. Any further decline is more likely to find decent support and attract buyers near the 154.50-154.45 horizontal resistance breakpoint, which could act as a key pivotal point and a strong near-term base.
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.