- The Japanese yen attracts new sellers on Tuesday amid fluctuations in the Bank of Japan’s interest rate hike expectations.
- Easing concerns about Trump’s tariff plans boosts risk appetite and also undermines the yen.
- Higher US bond yields inspired by the Fed favor US dollar bulls and support USD/JPY.
The Japanese yen is struggling to build on the gains recorded against its US counterpart over the past three days and attract new sellers during the Asian session on Tuesday. Investors remain uncertain about the likely timing of when Uncertainty surrounds the likely timing of when the Bank of Japan will raise interest rates again. Moreover, reports that US President-elect Donald Trump’s top economic advisers are considering a slow increase in tariffs are boosting investor confidence and undermining the safe-haven Japanese yen.
Moreover, the hawkish shift by the Federal Reserve (Fed) has dashed hopes of an immediate narrowing of the yield spread between the US and Japan, and is seen as another factor acting as a headwind for the Japanese yen. This, in turn, helps the USD/JPY pair stop its rebound from the multi-month peak it reached last Friday. Meanwhile, easing concerns about disruptive trade tariffs under Trump 2.0 are leading to a modest decline in US Treasury yields, keeping the US dollar (USD) below a two-year high and may cap the pair ahead of the US Producer Price Index (PPI). ).
JPY bulls have the upper hand amid uncertainty over the Bank of Japan’s rate hike
- Bank of Japan Deputy Governor Ryozo Himeno said on Tuesday that while the trend is for further interest rate hikes, the central bank should carefully monitor various upside and downside risks at home and abroad.
- Moreover, some investors are betting that the Bank of Japan may wait until April to get confirmation that the strong wage momentum will continue into spring negotiations before raising interest rates again.
- According to a Bloomberg report on Monday, US President-elect Donald Trump’s new economic team is considering a program of gradual increases in import tariffs over the coming months.
- The proposal, aimed at preventing a surge in inflation, would lead to a modest decline in US Treasury yields and spur some US dollar profit-taking from two-year highs.
- Against the backdrop of the Federal Reserve’s hawkish outlook, an upbeat US non-farm payrolls report on Friday raised doubts about the possibility of an interest rate cut in 2025 and should support the US dollar.
- The yield on 10-year US government bonds is falling from a 14-month high as investors look ahead to key inflation readings, starting with the Producer Price Index later today.
USD/JPY needs to find acceptance above 158.00 for the bulls to regain control
From a technical perspective, the overnight resilience below 157.00 and the subsequent upward move, combined with positive oscillators on the daily chart, favors bullish traders. However, an intraday failure near the round figure of 158.00 indicates that it is wise to wait for sustained strength beyond the mentioned handle before selecting positions for additional gains. USD/JPY may then accelerate momentum towards the 158.55 intermediate hurdle on its way to a multi-month high, around the 158.85-158.90 area. Some subsequent buying above the 159.00 mark will pave the way for further gains towards the next relevant hurdle near the mid-159.00 areas before spot prices aim to reclaim the psychological 160.00 mark.
On the flip side, the 157.00-156.90 area may continue to protect the immediate downtrend. Any further decline could be viewed as a buying opportunity around the 156.25-156.20 area, or last week’s swing low. This should help cap the downside in USD/JPY near the 156.00 level, which if broken decisively could shift the near-term bias in favor of bearish traders and pave the way for some meaningful corrective decline.
Frequently asked questions about the Japanese Yen
The Japanese Yen (JPY) is one of the most widely traded currencies in the world. Their value is determined broadly by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the spread between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the powers of the Bank of Japan is to control the currency, so its movements are key to the yen. The Bank of Japan has intervened directly in currency markets on occasion, generally to devalue the yen, although it often refrains from doing so due to the political concerns of its major trading partners. The Bank of Japan’s ultra-loose monetary policy between 2013 and 2024 caused the yen to depreciate against its major counterparts due to the growing policy divergence between the Bank of Japan and other major central banks. More recently, the gradual dismantling of this ultra-lenient policy has given some support to the yen.
Over the past decade, the Bank of Japan’s ultra-loose monetary policy stance has led to widening policy divergence with other central banks, especially the US Federal Reserve. This supported the widening of the spread between the US and Japanese 10-year bonds, which favored the US dollar against the Japanese yen. The Bank of Japan’s decision in 2024 to gradually abandon ultra-loose policy, along with interest rate cuts at other major central banks, are narrowing this spread.
The Japanese yen is often viewed as a safe investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency because of its supposed reliability and stability. Turbulent times are likely to strengthen the value of the yen against other currencies that are considered riskier to invest in.