- The Japanese Yen continues to be undermined by wavering BoJ rate hike expectations.
- The au Jibun Bank Japan Services PMI was revised down to 50.9 from 51.4 for December.
- The USD stands near a two-year top amid the Fed’s hawkish shift and supports USD/JPY.
The Japanese Yen (JPY) attracts fresh sellers at the start of a new week and drifts closer to a multi-month low against its American counterpart touched in December. The Bank of Japan’s (BoJ) dovish outlook, along with the prevalent risk-on mood, turn out to be key factors undermining the safe-haven JPY. Furthermore, a bullish US Dollar (USD), bolstered by the Federal Reserve’s (Fed) hawkish signal and the optimism over US President-elect Donald Trump’s expansionary policies, acts as a tailwind for the USD/JPY pair.
Meanwhile, data released earlier this Monday showed that the business activity in Japan’s service sector expanded for the second straight month in December. This comes on top of a pick-up in Japan’s service-sector inflation and backs the case for a January BoJ rate hike. Apart from this, geopolitical risks and concerns about Trump’s tariff plans hold back the JPY bears from placing aggressive bets. Moreover, speculations that Japanese authorities might intervene to prop up the domestic currency should help limit deeper JPY losses.
Japanese Yen continues to be pressured by doubts over further BoJ rate hike
- The Bank of Japan last month offered few clues on how soon it could push up borrowing costs again, while stressing the need to be more cautious amid domestic and global uncertainties.
- The au Jibun Bank Service Purchasing Managers’ Index (PMI) was revised down to 50.9 for December, from the flash reading of 51.4, still marked expansion for the second straight month.
- The survey further revealed that the subindex of new business rose for a sixth straight month, employment grew for the 15th consecutive month and business sentiment stayed positive.
- BoJ Governor Kazuo Ueda hopes that wages and prices increase at a balanced pace this year and said that the timing of adjusting monetary support depends on economic, price and financial developments.
- Markets expect that the BoJ will raise rates to 0.50% by the end of March from 0.25%. The next BoJ meeting is scheduled on January 23-24 followed by another meeting on March 18-19.
- The Institute of Supply Management (ISM) reported on Friday that the US Manufacturing PMI improved from 48.4 to 49.3 in December, pointing to signs of resilience and potential for growth.
- The Federal Reserve signaled in December that it would slow the pace of interest rate cuts in 2025, which has been pushing the US Treasury bond yields and the US Dollar higher in recent weeks.
- San Francisco Fed President Mary Daly said on Saturday that despite significant progress in lowering price pressures over the past two years, inflation remains uncomfortably above the 2% target.
- Traders now look to the US economic docket – featuring the release of the final Services PMI and Factor Orders data – for some impetus and short-term trading opportunities later today.
- Investors this week will confront other important US macro data – ISM Services PMI, JOLTS Job Openings, the ADP report on private-sector employment and the Nonfarm Payrolls (NFP) report.
USD/JPY bulls need to wait for sustained strength beyond the 158.00 mark
Any subsequent move-up is likely to face some resistance around the 158.00 neighbourhood, or the multi-month peak. A sustained move beyond will be seen as a fresh trigger for bullish traders and pave the way for additional gains amid positive oscillators on the daily chart. The USD/JPY pair might then aim to surpass the 158.45 intermediate hurdle and reclaim the 159.00 mark. The momentum could extend further towards the 160.00 psychological mark en route to the 160.50 area, which coincides with the top end of a multi-month-old ascending channel.
On the flip side, the Asian session low, around the 157.00 mark, now seems to protect the immediate downside ahead of the 156.65 horizontal zone and the 156.00 mark. Any further decline could be seen as a buying opportunity near the 155.50 region and help limit losses for the USD/JPY pair near the 155.00 psychological mark. The latter should act as a strong base for spot prices, which if broken decisively might shift the near-term bias in favor of bearish traders.
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.
