- The Japanese yen has struggled to take advantage of Friday's modest rebound against the US dollar.
- Questions about the Bank of Japan's interest rate hike plans and the widening gap in yields between Japan and the U.S. are weighing on the yen.
- Traders are now looking to the US Consumer Confidence Index for short-term stimulus later this Monday.
The Japanese yen (JPY) edged lower against the US yen at the start of the new week, eroding some of its smooth recovery from Friday's five-month low. Investors remain skeptical about the Bank of Japan's intention to raise interest rates further, which, along with a generally positive risk tone, will undermine the safe-haven Japanese yen. Separately, the yield gap between Japan and the U.S., which has widened recently due to the U.S. Federal Reserve becoming more hawkish, has also been found to be another factor putting pressure on the low-yield yen.
Still, solid inflation data released by Japan on Friday leaves the door open for the Bank of Japan to raise interest rates in January or March. Separately, persistent geopolitical risks from the protracted Russia-Ukraine war and tensions in the Middle East could support the yen, along with trade war concerns. Bears may refrain from making more aggressive bets amid speculation that Japanese authorities may intervene to support the country's currency, coupled with a slowdown in the U.S. dollar (USD). , there is a possibility that the USD/JPY market price will be suppressed.
Yen bears have the upper hand as the timing of the next Bank of Japan interest rate hike remains unclear
- The Bank of Japan decided last week to keep its short-term interest rate target unchanged at the end of its December policy meeting, but gave little clue as to how quickly that could push up borrowing costs.
- Japan's government bond yields fell to their lowest level in a month on Friday, in response to Bank of Japan Governor Kazuo Ueda's dovish signals and a very cautious stance on further monetary tightening.
- The benchmark 10-year U.S. Treasury yield rose last week to its highest level in more than six months, widening the gap between Japanese and U.S. yields and hurting the Japanese yen.
- A government report on Friday showed Japan's national consumer price index (CPI) rose more than expected in November, a precursor to further interest rate hikes by the Bank of Japan in early 2025.
- The US dollar fell from a two-year high on Friday after the personal consumption expenditure (PCE) price index showed signs of easing inflation and lingering challenges to the economy.
- According to a report published by the U.S. Bureau of Economic Analysis (BEA), the PCE price index rose slightly on an annual basis to 2.4% in November from 2.3% in the previous month.
- The core index, which excludes volatile food and energy prices, rose 2.8% during the reporting period, in line with October's reading but below market expectations of 2.9%.
- Further details in the report show that personal income increased by 0.3% in November, a sharp slowdown compared to the strong 0.7% increase recorded in October.
- Meanwhile, consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after being revised downward by 0.3% in October.
- Investors are now anxiously awaiting the release of the Conference Board's U.S. Consumer Confidence Index for short-term trading opportunities on the first day of the holiday-shortened week.
If USD/JPY rises further, it will likely face resistance near the 157.00 big mark
From a technical perspective, Friday's lows around 156.00-155.95 appear to be protecting the near-term downside. Further decline could be seen as a buying opportunity near the 155.50 horizontal zone. This next relevant support is anchored around the psychological mark of 155.00, and a decisive break of it could shift the short-term bias in favor of bearish traders and make the USD/JPY pair vulnerable to further declines. There is sex.
Meanwhile, the round number of 157.00 appears to be acting as an immediate hurdle ahead of the 157.40-157.45 area and a multi-month peak near the 157.90 area touched on Friday. With a positive oscillator visible on the daily chart, a follow-through buy above the 158.00 mark will be seen as another trigger for bullish traders. Thereafter, the USD/JPY pair may rise to the intermediate hurdle of 158.45 before aiming to recover the 159.00 mark.
Bank of Japan Frequently Asked Questions
The Bank of Japan (BoJ) is Japan's central bank, which determines the country's monetary policy. Its mission is to issue paper money and exercise monetary and financial control to ensure price stability, which means an inflation target of about 2%.
The Bank of Japan launched an ultra-easy monetary policy in 2013 to stimulate the economy and promote inflation in a low-inflation environment. The bank's policy is based on quantitative and qualitative easing (QQE), or printing money that provides liquidity by buying assets such as government bonds and corporate bonds. In 2016, the bank doubled down on its strategy, first introducing negative interest rates and then further easing policy by directly controlling the yield on 10-year Treasuries. In March 2024, the Bank of Japan raised interest rates, effectively retreating from its ultra-accommodative monetary policy stance.
The yen has weakened compared to major currencies due to the World Bank's large-scale economic stimulus package. This process is expected to worsen in 2022 and 2023 due to widening policy divergence between the Bank of Japan and other major central banks, which opted for significant rate hikes to combat the highest levels of inflation in decades. did. The Bank of Japan's policies have widened the gap between the yen and other currencies, and the value of the yen has fallen. This trend partially reversed in 2024, when the Bank of Japan decided to abandon its ultra-accommodative policy stance.
Japan's inflation rate has risen due to a weaker yen and soaring global energy prices, exceeding the Bank of Japan's 2% target. The prospect of domestic salary increases, a key driver of inflation, also contributed to the move.
