- USD/JPY lost momentum to around 157.75 early Friday Asian time.
- Tokyo CPI rose 3.0% year-on-year in December, compared to a 2.6% rise year-on-year.
- The Federal Reserve has signaled it will slow its rate of rate cuts, which could support the dollar.
In early Asian trading on Friday, USD/JPY lost momentum to around 157.75. The Japanese yen (JPY) has strengthened following the Tokyo Consumer Price Index (CPI) inflation statistics. Trading volumes are expected to be sluggish ahead of next week's year-end and New Year holidays.
Tokyo's headline CPI inflation rate rose to 3.0% year-on-year in December from 2.6% in November, according to data released by Japan's Statistics Bureau on Friday. Meanwhile, Tokyo's CPI, excluding fresh food and energy, was 2.4% year-on-year in December, compared to 2.2% a year ago. Tokyo CPI (excluding fresh food) rose 2.4% year-on-year in December, up from 2.2% in November, compared to an expected 2.5%. This outlook is likely to keep the Bank of Japan (BOJ) on track for a rate hike in January.
Bank of Japan Governor Kazuo Ueda said last week that the central bank expects Japan's economy to move closer to sustainably achieving the bank's 2% inflation target next year. “The timing and pace of adjusting the degree of monetary easing will depend on future economic, price and financial conditions,'' Ueda said.
Regarding the US dollar, expectations for less interest rate cuts by the US Federal Reserve (Fed) may support the US dollar in the short term. The Fed cut interest rates by a quarter of a percentage point at its December meeting, and now expects to cut interest rates only two times in 2025, down from four as originally expected.
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 ultra-easy policy from 2013 to 2024 widened the policy divergence between the Bank of Japan and other major central banks, causing the yen to weaken against major currencies. Recently, the gradual easing of this ultra-easy policy has provided some support to the yen.
Over the past decade, the Bank of Japan's commitment to ultra-easy monetary policy has widened its policy divergence from that of other central banks, particularly the US Federal Reserve. This confirmed the widening gap between US 10-year bonds and Japan's 10-year bonds, which favored the US dollar against the Japanese yen. The gap is narrowing with the Bank of Japan's decision to gradually abandon its ultra-easy policy in 2024, coupled with interest rate cuts by other major central banks.
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.
