- USD/JPY holds steady near 154.10 in Tuesday’s early Asian session.
- The US Composite PMI rose to 56.6 in December’s flash estimate vs. 54.9 prior.
- The BoJ is anticipated to keep the rate unchanged at its December meeting on Thursday.
The USD/JPY pair trades flat around 154.10 during the early Asia session on Tuesday. Traders prefer to wait on the sidelines ahead of the Federal Reserve (Fed) and the BoJ interest rate decision later this week. On Tuesday, the US November Retail Sales will be published.
The strong US economic data fails to boost the Greenback as the markets turn cautious ahead of the key events. Data released by S&P Global on Monday showed that the US Composite Purchasing Managers Index (PMI) rose to 56.6 in December’s flash estimate versus 54.9 prior. Meanwhile, the Services PMI improved to 58.5 in December’s flash estimate from 56.1. The Manufacturing PMI declined to 48.3 from 49.7.
The Fed will make its next decision on interest rates on Wednesday, which is widely expected to cut rates by 25 basis points (bps). According to the CME FedWatch tool, markets are now almost fully pricing a 25 basis points (bps) cut at the Fed’s December meeting, compared with about a 78% chance a week ago. Investors will closely monitor Fed Chair Jerome Powell’s press conference and Summary of Economic Projections (dot-plot) after the meeting.
On the other hand, the growing expectation that the Bank of Japan (BoJ) will keep rates steady at the December meeting on Thursday might weigh on the Japanese Yen (JPY). The markets are currently pricing in less than a 30% possibility of a rate hike in December. Several BoJ policymakers appear to be in no rush to tighten their monetary policy further with little risk of inflation overshooting despite Japan’s still near-zero borrowing costs.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
