The Japanese yen held a strong position against the US dollar during Asian trading on Monday, supported by hawkish signals from the Bank of Japan (BOJ). Data indicating wage growth in Japan has solidified market expectations for an interest rate hike by the BOJ in December. This change could alleviate the negative impact of disappointing GDP growth from the third quarter and provide a slight boost to the yen. Additionally, a prevailing cautious sentiment in the market seems to reinforce the yen’s appeal as a relatively safe asset.
At the same time, yields on Japanese government bonds (JGB) are nearing multi-year highs, driven by rising expectations for a rate hike from the BOJ and broader fiscal concerns. Consequently, the interest rate gap between Japan and other major economies has narrowed, further contributing to decreased yields for the yen. On the other hand, the US dollar is languishing near its lowest level since late October, with expectations that the Federal Reserve might cut interest rates later this week, thereby exerting further pressure on the USD/JPY pair.
The Japanese yen remains favorable amid BOJ expectations and a weakening risk tone
- Government data released on Monday showed that Japan’s nominal wages increased by 2.6% year-on-year in October, surpassing expectations of 2.2%, marking the strongest growth in three months. However, despite consumer prices rising by 3.4%, real wages—adjusted for inflation—declined by 0.7% year-on-year for the tenth straight month.
- This scenario puts pressure on the Bank of Japan and has likely contributed to a slight rise in the yen during the Asian session, amid speculation about potential rate hikes at the upcoming December meeting. Interestingly, this increase occurred despite downward revisions to third-quarter GDP figures, suggesting a faster contraction in Japan’s economy than previously estimated.
- Revised data from the Cabinet Office indicated that Japan’s economy contracted by 0.6% in the July to September timeframe, a sharper decrease than the initial estimate of 0.4%. Year-on-year, the economy shrank by 2.3%, marking the fastest decline since the third quarter of 2023, compared to earlier forecasts of 2.0% and 1.8% declines.
- Despite this, investors appear optimistic that higher wages could stimulate the economy by enhancing household purchasing power, which may lead to increased spending and demand-driven inflation. Moreover, BOJ Governor Kazuo Ueda mentioned last week that the probability of meeting economic and price goals seems to be improving.
- Alongside Prime Minister Sanae Takaichi’s efforts for economic reflation and substantial spending proposals, the yields on the benchmark 10-year JGB reached their apex last Thursday since 2007. Yields on 20-year and 30-year bonds also soared to their highest levels since 1999, all of which lend further strength to the yen.
- In contrast, traders are now factoring in nearly a 90% likelihood that the Fed will reduce borrowing costs again on Wednesday, according to CME Group’s FedWatch tool. This reduces the strength of the US dollar, keeping it close to its lowest figures since late October and putting pressure on the USD/JPY pair.
- However, USD bears are likely to adopt a cautious approach, waiting for more signals regarding the Fed’s path on rate cuts. Consequently, the focus will remain on the latest economic predictions, including the so-called dot plot, and remarks from Fed Chairman Jerome Powell during the post-meeting media briefing.
USD/JPY bears may hold off until a drop below 154.35 occurs
On Friday, the USD/JPY faced challenges maintaining its position above the 100-hour simple moving average (SMA), and the ongoing decline has favored bearish traders. Technical indicators on the hourly chart remain in negative territory, signaling the possibility of further losses. A neutral oscillator on the daily chart suggests caution. If declines continue throughout the day, some support might be found around Friday’s swing low of approximately 154.35, below which the price could fall to the round figure of 154.00.
Conversely, if a significant recovery occurs, it may encounter resistance near the 155.35 region or the 100-hour SMA. Any sustained buying above Friday’s swing high around the mid-155.00 level could trigger a short-covering event, pushing the USD/JPY back to the 156.00 level. This momentum could potentially build towards the next important resistance around 156.60-156.65, which leads towards the round figure of 157.00.
