- The Japanese yen strengthened following the release of Japan’s consumer inflation statistics.
- Uncertainty over the Bank of Japan’s future policy measures does not allow for meaningful upside.
- A moderate USD strength could help limit losses on the USD/JPY pair.
The Japanese yen (JPY) has shown a modest recovery after hitting a year-to-date low on Friday and continues to maintain an advantage against the US yen heading into European trading. Japan’s consumer inflation rate remains above the Bank of Japan’s (BOJ) target of 2%, according to data released today. Additionally, most Japanese companies have agreed to labor union demands for higher wages, which is expected to push up inflation in the coming months. This confirms expectations for further policy tightening by the Bank of Japan and provides some support for the yen.
However, the Bank of Japan said earlier this week that financial conditions remained accommodative and stopped short of providing any guidance on the pace of policy normalization. This has increased uncertainty over the central bank’s future policy actions, and combined with the underlying bullish mood across global financial markets, has limited any meaningful upside for the safe-haven yen. Separately, some sustained U.S. dollar (USD) buying should help limit the downside for USD/JPY and warrants some vigilance for active bearish traders.
Daily Digest Market Movers: Japanese Yen bulls remain on the sidelines despite rising domestic consumer inflation
- Japan’s consumer price index rose to 2.8% year-on-year from 2.2% in February, remaining well above the Bank of Japan’s 2% target and providing some support for the Japanese yen on the final day of the week.
- Core CPI, which excludes volatile fresh food prices, rose sharply from the 2% annualized pace seen in January to 2.8% during the reporting month, broadly in line with market expectations.
- Meanwhile, the so-called “core-core” index, which excludes both fresh food and energy prices, has fallen further from its 40-year high in 2023 to 3.2% in February (previously 3.5%).
- This comes on top of much larger-than-expected wage increases by Japan’s biggest companies, which are expected to accelerate demand-driven inflation and should allow the Bank of Japan to further tighten monetary policy.
- Japan’s Finance Minister Shunichi Suzuki reiterated that the government is closely monitoring exchange rate trends with a high sense of crisis, and that it is important that exchange rates reflect fundamentals and remain stable.
- Bank of Japan Governor Kazuo Ueda said on Friday that the central bank’s holdings of Japanese government bonds (JGBs) will remain at current levels for the time being, which will limit further appreciation in the yen.
- Despite the Fed expecting three rate cuts this year, rising U.S. Treasury yields should see the dollar regain positive traction on Thursday, supporting the USD/JPY pair.
- The U.S. Department of Labor (DOL) reported 210,000 new jobless claims for the week ending March 16, compared with 212,000 the previous week and higher than expectations of 215,000.
- Market participants are now looking forward to Fed Chairman Jerome Powell’s speech scheduled for early in the North American session for meaningful stimulus and short-term trading opportunities.
Technical analysis: USD/JPY correction rebound may be seen as a buying opportunity and may remain limited
From a technical perspective, the strong overnight rally stalled around the 151.75 zone, just before the year-to-date peak set on Wednesday. This will be followed by a multi-decade high near the 152.00 mark in November 2022, which, if bravely cleared, would provide another opportunity for bullish traders. Thereafter, the USD/JPY pair could further develop the long-term uptrend seen since January 2023.
On the flip side, a meaningful corrective decline currently seems to have good support around the 151.00 mark, below which the spot price could return to the 150.25 area. Some follow-through selling leading to a subsequent breakout of the psychological mark 150.00 could expose the next relevant support around the 149.35-149.30 area. The USD/JPY pair could eventually fall to the big 149.00 level.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by trends in Japan’s economy, but more specifically by factors such as the Bank of Japan’s policies, the difference in Japanese and U.S. bond yields, and traders’ risk sentiment.
One of the Bank of Japan’s missions is exchange control, so its trends are key to the yen. The Bank of Japan occasionally intervenes directly in currency markets, generally to devalue the yen, but does not do so frequently due to political concerns in major trading partners. The Bank of Japan’s current ultra-easy monetary policy, based on large-scale economic stimulus, has caused the yen to weaken against major currencies. This process has recently been exacerbated by increased policy divergence between the Bank of Japan and other major central banks, which have taken significant steps to combat the highest levels of inflation in decades. They are choosing to raise interest rates.
The Bank of Japan’s commitment to ultra-easy monetary policy has widened the gap between its policies and those of other central banks, especially the US Federal Reserve. This confirms the widening gap between the US and Japanese 10-year bonds, favoring the US dollar versus the Japanese yen.
The Japanese yen is often seen as a safe investment. This means that when markets are under stress, investors are more likely to put money into the Japanese currency, which is expected to be reliable and stable. Times of turmoil are likely to increase the value of the yen against other currencies that are considered riskier investments.
