The Japanese Yen (JPY) is experiencing strength against the US Dollar (USD) during the Asian trading session, buoyed by expectations of a hawkish stance from the Bank of Japan (BoJ). Insights from Japan’s recent wage growth data are fueling projections of an imminent interest rate hike by the BoJ, expected in December. This development, despite a disappointing Gross Domestic Product (GDP) report for Q3, is lending support to the JPY and simultaneously enhancing its status as a safe-haven currency amid a wary market atmosphere.
On Monday, government data revealed that Japan’s Nominal Wages increased by 2.6% year-on-year in October, surpassing predictions of 2.2%. This marks the most significant wage growth in three months, yet inflation-adjusted real wages have decreased for the tenth consecutive month, dropping 0.7% compared to the previous year as consumer prices rose by 3.4%. The evidence of increasing wages heightens the pressure on the BoJ, stoking speculation that policymakers might pursue another rate hike during the December meeting.
Despite the encouraging wage growth, Japan’s economy saw a deeper contraction than initially projected. The revised GDP data demonstrated a 0.6% decrease for the July-September period, a steeper decline than the initial estimate of 0.4%. Year-on-year, the economy contracted by 2.3%, marking the fastest drop since Q3 2023 and straying further from the predicted 2.0% decline. Nevertheless, many market participants remain optimistic, believing that rising wages will enhance household purchasing power and stimulate spending, contributing to demand-driven inflation, which could, in turn, support economic recovery.
BoJ Governor Kazuo Ueda recently indicated that the likelihood of achieving economic and price projections is increasing, reflecting a potentially evolving approach from the central bank. This sentiment is echoed by Prime Minister Sanae Takaichi, who has advocated for reflationary measures alongside a substantial fiscal spending plan. Consequently, the benchmark 10-year Japanese government bond yield has reached its highest levels since 2007, with longer-dated bonds also climbing to levels not seen since 1999, reinforcing support for the JPY.
On the contrary, the USD remains under pressure, trading near its lowest point since late October. Market sentiment anticipates that the US Federal Reserve (Fed) may lower borrowing costs in the forthcoming meeting, exerting additional downward pressure on the USD/JPY exchange rate. Speculation regarding the Fed’s rate-cut path is keeping USD bears from making aggressive moves, as they await further guidance from the central bank’s economic projections and commentary from Fed Chair Jerome Powell.
The USD/JPY pair is grappling with resistance below the 100-hour Simple Moving Average as bearish traders maintain control. Current technical indicators suggest potential for further losses, although daily oscillators indicate a need for caution. A continued decline may find support around Friday’s swing low near 154.35, below which the JPY could approach the 154.00 mark. On the upside, any recovery efforts are likely to encounter resistance around the 155.35 level, as well as the 100-hour SMA, with further buying needed across the mid-155.00s to regain momentum towards the 156.00 threshold and potentially higher levels near 156.60-156.65.
Despite the prevailing uncertainties in the market, the interaction between wage growth, central bank policies, and investor sentiment will remain pivotal for the trajectory of both the JPY and USD in the upcoming trading sessions.
