Japanese Yen remains on backfoot amid uncertainty over BoJ's rate-hike plans

  • The Japanese Yen lost ground as Japanese CPI fell to 2.5% YoY in April from 2.7% prior.
  • The Japanese inflation remains above the 2% target, keeping the BoJ under pressure to tighten policy further.
  • The US Dollar fails to hold gains even though uncertainty over Fed reducing interest rates in September has deepened.

The Japanese Yen (JPY) remains on the backfoot in Friday's New York session after the release of softer National Consumer Price Index (CPI) data by the Statistics Bureau of Japan. The annual inflation rate dropped to 2.5% in April from 2.7% in the previous month, marking the second consecutive month of moderation but still staying above the Bank of Japan’s (BoJ) 2% target. This sustained inflation keeps pressure on the central bank to consider further policy tightening.

The Bank of Japan has emphasized that a virtuous cycle of sustained, stable achievement of its 2% price target, along with strong wage growth, is essential for normalizing policy. Meanwhile, investors expect that the persistent weakness of the JPY might compel the BOJ to advance its next interest rate hike to mitigate the impact on the cost of living, according to Reuters.

US Dollar (USD) falls sharply despite hawkish sentiment surrounding the Federal Reserve (Fed) with the intention to maintain higher policy rates for an extended period. This sentiment is reinforced by the higher-than-expected United States (US) Purchasing Managers Index (PMI) data that was released on Thursday.

Daily Digest Market Movers: Japanese Yen extends losses as soft CPI raises concerns over BoJ plans of tightening policy further

  • Japan’s Core CPI (YoY), which excludes fresh food but includes fuel costs, rose 2.2% in April as expected, slowing for the second straight month, as compared to March’s reading of 2.6%.
  • The S&P Global US Composite PMI jumped to 54.4 in May, from 51.3 in April, reaching its highest point since April 2022 and surpassing market expectations of 51.1. The Service PMI climbed to 54.8, reflecting the largest output growth in a year, while the Manufacturing PMI edged up to 50.9.
  • According to the CME FedWatch Tool, the probability of the Federal Reserve reducing interest rates in September has declined to 49% from 51% a day earlier.
  • The Bank of Japan announced on Thursday that it left the amount of Japanese government bonds (JGB) unchanged compared to the previous operation. Over a month ago, the BoJ trimmed the amount of 5-10 years it bought in a scheduled operation.
  • Tensions are escalating following Lai Ching-te's assumption of office as Taiwan's new president. Chinese state media reports indicate that China has deployed numerous fighter jets and conducted simulated strikes in the Taiwan Strait and around groups of Taiwan-controlled islands, per Reuters.
  • Japan’s Manufacturing Purchasing Managers Index (PMI), released on Thursday by Jibun Bank and S&P Global, rose to 50.5 in May from April’s 49.6, surpassing market expectations of 49.7. This marks the first growth since May 2023. Meanwhile, the Services PMI fell to 53.6 from the previous 54.3, still indicating the fastest expansion in eight months.
  • Japan’s 10-year government bond yield surpassed 1% this week for the first time since May 2013, fueled by traders' increasing bets that the Bank of Japan would tighten policy further in 2024.

Technical Analysis: USD/JPY aims to establish above 157.00

The USD/JPY pair trades close to 157.00. A rising wedge pattern on the daily chart suggests a potential bearish reversal as the pair approaches the wedge’s tip. Despite this, the 14-day Relative Strength Index (RSI) remains above 50, indicating continued bullish momentum. A decline below this level would signify a shift in momentum.

The USD/JPY pair might retest the upper boundary of the rising wedge at approximately 157.20. If it breaks above this level, the pair could advance toward the recent high of 160.32.

On the downside, the nine-day Exponential Moving Average (EMA) at 156.33 seems to appear as immediate support, followed by the lower threshold of the rising wedge and a psychological level of 156.00. A break below this level could exert downward pressure on the USD/JPY pair, potentially moving it toward the throwback support at 151.86.

USD/JPY: Daily Chart

Japanese Yen price today

The table below shows the percentage change of the Japanese Yen (JPY) against listed major currencies today. Japanese Yen was the weakest against the Euro.

USD   -0.06% -0.03% -0.04% 0.00% 0.04% 0.00% 0.07%
EUR 0.05%   0.03% 0.02% 0.08% 0.11% 0.07% 0.12%
GBP 0.03% -0.02%   0.00% 0.05% 0.11% 0.05% 0.08%
CAD 0.03% -0.01% -0.01%   0.04% 0.09% 0.04% 0.08%
AUD 0.01% -0.06% -0.04% -0.05%   0.04% -0.01% 0.07%
JPY -0.06% -0.12% -0.10% -0.08% -0.08%   -0.03% -0.01%
NZD 0.00% -0.05% -0.05% -0.04% 0.01% 0.04%   0.04%
CHF -0.06% -0.08% -0.09% -0.11% -0.05% 0.00% -0.07%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

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 has embarked in an ultra-loose monetary policy since 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.

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.


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