The USD/JPY pair has experienced a decline, settling around 155.10 during the early Asian trading session on Tuesday. The Japanese Yen (JPY) has gained some strength against the US Dollar (USD), driven by rising expectations that the Bank of Japan (BoJ) will implement an interest rate hike during its upcoming policy meeting scheduled for Friday.
Market participants are keenly focused on several key economic indicators from the United States, including the Nonfarm Payrolls (NFP), Retail Sales, and Purchasing Managers Index (PMI), which are set to be released later today. The anticipation of a potential BoJ rate hike has bolstered support for the JPY and created resistance for the USD/JPY pairing. Reports have suggested that the Bank of Japan is likely to commit to a continued increase in interest rates, particularly looking ahead to its December policy meeting. While a hike is anticipated this week, the pace of future rate increases is expected to be contingent upon how the economy reacts to each adjustment.
An available poll from Reuters conducted between December 2 and 9 indicates that a substantial 90% of economists foresee an increase in the BoJ’s short-term interest rates from 0.50% to 0.75% at the December meeting. This reflects a notable rise in expectations compared to a previous survey where only 53% of economists anticipated a rate hike.
In light of the recent government shutdown, an array of US economic data has been delayed and will be released today. This includes employment reports for October and November, which could shed light on the current state of the labor market and influence forecasts for the Federal Reserve’s January meeting. Additionally, the US Consumer Price Index (CPI) inflation figures are scheduled to be released on Thursday. Robust employment data could give the US Dollar a boost, while any indication of a weakening labor market could further undermine its strength.
The Japanese Yen is regarded as one of the most traded currencies globally, with its value closely tied to the economic performance of Japan. More specifically, the policies established by the Bank of Japan, the differential between US and Japanese bond yields, and prevailing risk sentiment are significant factors influencing the Yen’s valuation.
The BoJ has historically prioritized currency control; hence, its monetary decisions are crucial for the Yen’s dynamics. In the past, the BoJ has intervened in currency markets, typically aiming to lower the Yen’s value but has exercised caution due to political considerations from major trade partners. The ultra-loose monetary policy adopted between 2013 and 2024 resulted in depreciation for the Yen against other leading currencies, largely due to the diverging policies among major central banks. However, the recent steps towards unwinding this loose policy have started to provide some support to the Yen.
Over the past decade, the BoJ’s commitment to maintaining an ultra-loose monetary stance has contributed to a growing policy divergence from other central banks, notably the Federal Reserve. This divergence has led to an expanding gap between US and Japanese long-term bond yields, favoring the US Dollar. The decision made in 2024 to gradually move away from an ultra-loose policy, coupled with interest rate cuts by other key central banks, is seen as an effort to close this gap.
Additionally, the Japanese Yen is often viewed as a safe-haven asset. In times of market volatility, it tends to attract investors seeking stability and reliability, leading to strengthened demand and an increase in its value relative to more volatile currencies.
