The Japanese yen (JPY) has hit a three-week low against a robust US dollar (USD) as we approach Friday’s European trading session, and it seems more declines could be on the horizon. There’s growing concern that if inflation continues to outstrip wage growth into early 2026, it might dampen consumption momentum. This overshadowed an unexpected uptick in Japan’s household spending data for November. As tensions rise between Japan and China, the uncertainty surrounding the timing of the Bank of Japan’s next interest rate decision grows, putting additional pressure on the yen.
On a related note, worries about Japan’s financial stability and the overall stock market’s steady performance are adding to the strain on the yen, which is typically seen as a safe haven. Meanwhile, the US dollar has maintained its upward trajectory over the past two weeks, hitting a one-month peak, partly due to recent shifts ahead of the US Non-Farm Payrolls (NFP) report, contributing to the strength of the USD/JPY pair. Yet, there are speculations the Federal Reserve may further reduce interest rates, which contrasts sharply with the more hawkish outlook from the Bank of Japan, potentially lending some support to the lower-yielding yen.
Yen bears dominate amid escalating Sino-Japanese tensions and uncertainty from the Bank of Japan
- This Friday, Japan’s Statistics Bureau reported a surprising 2.9% year-on-year increase in household spending for November, rebound from a significant drop in October. However, this good news does little to alleviate pressure on the yen as real wages remain stagnant.
- In fact, data released Thursday indicated that Japan’s real wages, adjusted for inflation, fell by 2.8% in November, marking the 11th consecutive month of declines. This suggests that inflation continues to outpace wage growth, presenting a persistent challenge for the Bank of Japan and negatively impacting the yen’s exchange rate.
- Additionally, China’s conflict with Japan has escalated, leading to restrictions on exports of rare earths and magnets to Japan. This ban comes in response to comments from Japan’s prime minister regarding Taiwan, increasing supply chain risks for Japanese manufacturers and contributing to yen weakness.
- Earlier this week, Bank of Japan Governor Kazuo Ueda stated that the central bank plans to continue increasing interest rates if economic and pricing trends develop as anticipated, keeping the door open for further policy adjustments. This, alongside rising geopolitical tensions, may bolster the safe-haven status of the yen.
- Meanwhile, the US dollar held onto gains from the past fortnight and remained strong near one-month highs, adding further support for the USD/JPY pair. Nonetheless, the potential for limitations in the dollar’s upside looms, especially with dovish forecasts from the US Federal Reserve and upcoming US employment data.
- Traders are anticipating the U.S. central bank may cut borrowing costs in March and possibly lower rates further by year-end. Still, many are opting to wait for additional indications regarding the Fed’s rate-cut strategy, keeping the spotlight on the forthcoming non-farm payrolls report.
USD/JPY surpasses weekly high, poised for potential further gains
The 100-period simple moving average (SMA) on the 4-hour chart indicates a moderate rise at 156.31, suggesting an ongoing upward trend. The USD/JPY pair trades above this SMA, which serves as immediate dynamic support. The Moving Average Convergence Divergence (MACD) line is positioned above the signal line and has returned to positive territory, with the histogram slowly increasing, reinforcing the momentum. The Relative Strength Index (RSI) sits at 62, reflecting significant buying pressure without indicating an overbought condition. If this momentum persists, the pair could climb higher; however, a pullback would place focus on the 100 SMA.
