- Following the upward revision of Japan's third quarter GDP, the Japanese yen rose slightly.
- The recent decline in US Treasury yields has hurt the US dollar and also benefited the yen.
- Questions about the Bank of Japan's ability to raise interest rates are further limiting the yen's upside.
The Japanese yen (JPY) continues to struggle to gain meaningful traction, fluctuating within a familiar range against the US yen during Asian trading on Monday. Initial reaction to the upward revision of Japan's third-quarter GDP forecast proved limited amid doubts over whether the Bank of Japan (BOJ) would raise interest rates further in December. This, along with a modest rise in the US dollar (USD), is a tailwind for the USD/JPY pair.
Still, geopolitical tensions, as well as concerns about looming trade tariffs from President-elect Donald Trump and the recent drop in U.S. bond yields, are providing some support for the safe-haven Japanese yen. On the other hand, aggressive traders should be cautious due to the mixed fundamental environment. Investors are currently looking to this week's US consumer inflation data for clues on the US Federal Reserve's rate cut path, which should provide fresh impetus to the USD/JPY pair.
Japanese Yen traders remain wait-and-see as fundamental indicators are mixed
- Japan's third quarter GDP has been revised to grow by 0.3%, compared to the initial forecast of 0.2%. On an annual basis, the economy expanded by 1.2%, exceeding the prior forecast of 0.9%.
- While this annual rate is significantly slower than the 2.2% increase seen in the previous quarter, weak consumer spending suggests that the boost from large wage increases is reaching its limit.
- This, in turn, raises questions about whether the Bank of Japan has enough headroom to raise interest rates further and whether it can support the yen's modest intraday strength on Monday.
- The U.S. nonfarm payrolls (NFP) report released Friday shows the economy added 227,000 jobs in November, compared to an upwardly revised estimate of 36,000 and 200,000 in the previous month. revealed that he had done so.
- Further details in the report showed the unemployment rate rose slightly in November to 4.2% from 4.1% as expected, and average hourly wages held steady at 4% versus 3.9% expected.
- The key jobs report reaffirmed market expectations that the Federal Reserve is unlikely to halt its easing cycle and lower borrowing costs again at its December policy meeting.
- The University of Michigan's preliminary measure of U.S. consumer sentiment rose to 74.0 from 71.8 in December, and inflation expectations one year out rose to 2.9% from 2.6% in November.
- Cleveland Fed President Beth Hammack said it was reasonable for the market to expect one rate cut between now and the end of January, but economic conditions called for moderately restrictive policy.
- San Francisco Fed President Mary Daly said the labor market remains in good shape and the central bank will continue to raise interest rates if inflation starts to accelerate again.
- Chicago Fed President Austan Goolsby said overall inflation developments remain encouraging and that changes in inflation and labor market conditions could lead to a pause in rate cuts.
- Federal Reserve President Michelle Bowman said any interest rate cuts should be done cautiously, stressing that underlying inflation remains uncomfortably above the central bank's 2% target.
- Benchmark 10-year U.S. Treasury yields are hovering near their lowest levels since Oct. 21, dampening the U.S. dollar's recovery from multi-week lows and supporting the low-yielding yen.
USD/JPY technical setup continues to tilt in favor of bearish traders
From a technical perspective, the range-bound price action could be classified as a bearish consolidation on the back of the recent pullback from November's multi-month highs. Furthermore, the oscillator on the daily chart remains in negative territory, suggesting that the path of least resistance for the USD/JPY pair is to the downside. That said, last week's rebound below the 100-day simple moving average (SMA) warrants some caution for bearish traders.
Meanwhile, the post-NFP low, near the 149.35 area, appears to be acting as immediate support ahead of the 149.00 mark and the 100-day SMA, which is currently pegged around 148.70-148.65. The latter is in line with last Tuesday's nearly two-month low, which should be a key takeaway. Some follow-through selling could drag the USD/JPY pair into the 148.10-148.00 area on its way to the 147.35-147.30 zone and the 147.00 round number.
Conversely, any attempt at recovery may encounter resistance near the 150.55 area. This is followed by a hurdle of 150.70, a round number of 151.00, and last week's swing high around the 151.20-151.25 zone. A sustained rise above the latter could allow the USD/JPY pair to test the all-important 200-day SMA near the 152.00 mark. Some follow-through buying could signal that the correctional decline from multi-month highs has run its course and the bias has shifted in favor of bullish traders.
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.
