Japanese Yen edges lower vs USD; BoJ-Fed policy divergence to limit deeper losses
- 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) extends the overnight pullback from a four-day trough and trades with a mild negative bias against its American counterpart during the Asian session on Friday. Investors remain worried about Japan's deteriorating fiscal condition on the back of Prime Minister Sanae Takaichi's massive spending plan and sluggish economic growth. Moreover, the prevalent risk-on environment is seen undermining the safe-haven JPY. Any meaningful downside for the JPY, however, seems elusive in the wake of rising bets for an imminent rate hike by the Bank of Japan (BoJ) as early as next week.
Hence, traders might refrain from placing aggressive directional bets and opt to wait for the outcome of the December 18-19 BoJ policy meeting, which will play a key role in providing a fresh impetus to the JPY. The US Dollar (USD), on the other hand, languishes near a two-month low touched on Thursday amid rising bets for more rate cuts by the Federal Reserve (Fed). This marks a significant divergence in comparison to hawkish BoJ expectations, which, in turn, should act as a tailwind for the lower-yielding JPY and keep a lid on the USD/JPY pair's attempted recovery from sub-155.00 levels.
Japanese Yen bulls turn cautious amid receding safe-haven demand, fiscal concerns
- 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.
- 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 might face stiff resistance near the overnight swing high, around 156.15
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.
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.