Japanese Yen bulls have the upper hand as hawkish BoJ outlook offsets risk-on mood
|- The Japanese Yen drifts lower as the upbeat market mood undermines safe-haven demand.
- Concerns about Japan’s deteriorating fiscal condition also keep the JPY bulls on the defensive.
- The divergent BoJ-Fed policy expectations should cap any further gains for the USD/JPY pair.
The Japanese Yen (JPY) remains on the back foot through the early European session on Friday, though it lacks bearish conviction amid hawkish Bank of Japan (BoJ) expectations. Traders have been pricing in the possibility that the BoJ will hike interest rates as early as next week. This marks a significant divergence in comparison to bets for more rate cuts by the US Federal Reserve (Fed), which keeps the US Dollar (USD) depressed near a two-month low and acts as a tailwind for the lower-yielding JPY.
Meanwhile, Prime Minister Sanae Takaichi's massive spending plan has exacerbated concerns about Japan's public finances amid sluggish economic growth. This, along with the prevalent risk-on environment, is holding back traders from placing aggressive bearish bets around the safe-haven JPY. Nevertheless, the JPY remains on track to register modest weekly losses, though the aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair remains to the downside.
Japanese Yen bulls seem hesitant despite rising BoJ rate hike bets
- Asian stocks advanced in early trade on Friday, tracking the overnight strength on Wall Street, and undermine traditional safe-haven assets. Adding to this, concerns about Japan's public finances on the back of Prime Minister Sanae Takaichi's reflationary push keep the Japanese Yen on the back foot during the Asian session.
- The Corporate Goods Price Index released on Wednesday indicated that inflation in Japan remains above the historic levels. This validates Bank of Japan Governor Kazuo Ueda's hawkish view earlier this week that the likelihood of the central bank's baseline economic and price outlook materialising had been gradually increasing.
- This backs the case for a further BoJ policy normalization. Traders might also refrain from placing aggressive JPY bearish bets ahead of the highly anticipated two-day BoJ meeting starting on December 18. Moreover, the prevalent US Dollar bearish sentiment might keep a lid on any meaningful upside for the USD/JPY pair.
- Reuters reported this Friday that the BoJ is likely to maintain its pledge next week to keep raising rates, with the pace dependent on how the economy reacts to each increase. The report adds that the BoJ will not release an updated estimate on the neutral rate and won't use it as a main communication tool on rate-hike timing.
- In a widely expected move, the US Federal Reserve lowered borrowing costs by 25 basis points at the end of a two-day policy meeting on Wednesday and projected just one more rate cut in 2026. Investors, however, remained hopeful about two more rate cuts in 2026 in the wake of Fed Chair Jerome Powell's dovish remarks.
- During the post-meeting press conference, Powell told reporters that the US labor market has significant downside risks and the Fed does not want its policy to push down on job creation. This, in turn, keeps the USD close to an over two-month low, touched on Thursday, and should act as a headwind for the USD/JPY pair.
- Traders now look forward to speeches from influential FOMC members, which might provide some impetus later during the North American session in the absence of any relevant economic releases from the US. The focus, however, will remain glued to the highly-anticipated BoJ monetary policy meeting next week.
USD/JPY upside potential seems limited; 155.00 holds the key for bullish traders
From a technical perspective, the overnight swing high, or levels just above the 156.00 round figure, could act as an immediate hurdle for the USD/JPY pair. A sustained strength beyond might trigger a fresh bout of a short-covering move and push spot prices to the 157.00 neighborhood, or the weekly high. Some follow-through buying should pave the way for additional gains towards the 157.45 intermediate hurdle en route to a multi-month top, around the 158.00 mark, touched in November.
On the flip side, bearish traders might now wait for acceptance below the 155.00 psychological mark before placing fresh bets. The USD/JPY pair might then turn vulnerable to accelerate the fall towards retesting the monthly trough, around the 154.35 area, touched last Friday. This is closely followed by the 154.00 round figure, below which spot prices could slide to the next relevant support near the 153.60 region before eventually dropping to sub-152.00 levels.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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