- The Japanese Yen attracts some dip-buyers following an Asian session slide on Tuesday.
- Bets that the BoJ will hike interest rates further continue to act as a tailwind for the JPY.
- Retreating JGB yields might cap gains for the JPY and lend support to the USD/JPY pair.
The Japanese Yen (JPY) reverses Asian session losses against its American counterpart, dragging the USD/JPY pair back below the 150.00 psychological mark in the last hour. Japan’s Services Producer Price Index (PPI) released earlier this Tuesday underscores the view that rising wages are persuading firms to pass on higher labour costs through price hikes. This comes on top of Japan’s strong consumer inflation figures and reaffirms bets that the Bank of Japan (BoJ) will hike interest rates further, which, in turn, continues to underpin the JPY.
Meanwhile, BoJ Governor Kazuo Ueda’s remarks last week, saying that the central bank stands ready to increase government bond buying if long-term interest rates rise sharply, keep the Japanese government bond (JGB) yields depressed below a multi-year top. This might hold back the JPY bulls from placing aggressive bets and help limit the downside for the USD/JPY pair amid a modest US Dollar (USD) bounce from over a two-month low. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the JPY is to the upside.
Japanese Yen continues to draw support from rising bets for more BoJ rate hikes
- Bank of Japan Governor Kazuo Ueda issued a mild warning last Friday and said that the central bank could increase bond buying if abnormal market moves trigger a sharp rise in yields.
- Ueda’s remarks dragged the yield on the benchmark Japanese government bond away from its highest level since November 2009 and weighed on the Japanese Yen earlier this Tursday.
- Some market players, however, expect that the 10-year JGB could rise to 1.5% in the coming weeks, with growing acceptance that the BoJ will hike rates further amid broadening inflation in Japan.
- The bets were lifted by Japan’s strong consumer inflation figures released last week and the Services Producer Price Index (PPI), which rose 3.1% YoY in January and signaled persistent cost pressures.
- The recent downbeat US economic data raised doubts about consumer health and the growth outlook amid worries that US President Donald Trump’s tariff plans could undermine domestic demand.
- The S&P Global’s flash US PMIs pointed to a weaker expansion in overall business activity and the University of Michigan’s US Consumer Sentiment Index dropped to a 15-month low in February.
- Federal Reserve officials, however, remain wary of future rate cuts. In fact, Chicago Fed President Austan Goolsbee said that the central bank needs more clarity on Trump’s policies before going back to cut rates.
- This assists the US Dollar in building on the previous day’s bounce from its lowest level since December 10 and continues to push the USD/JPY pair higher for the second successive day on Tuesday.
- Traders now look to the US macro data – Conference Board’s Consumer Confidence Index and Richmond Manufacturing Index. This, along with Fed speaks, might influence the USD.
- The focus, however, will remain glued to the release of the US Personal Consumption Expenditure (PCE) Price Index on Friday, which could provide cues about the Fed’s rate-cut path.
USD/JPY bears have the upper hand while below the 151.00-150.90 support breakpoint
From a technical perspective, any subsequent move-up could attract fresh sellers and remain capped near the 150.90-151.00 horizontal support breakpoint. A sustained strength beyond, however, might trigger a short-covering rally and lift the USD/JPY pair towards the 151.40 intermediate hurdle en route to the 152.00 mark. The momentum could extend further, though it runs the risk of fizzling out rather quickly near the 152.65 area, representing the very important 200-day Simple Moving Average (SMA).
On the flip side, the 149.65-149.60 area, or the Asian session low now seems to protect the immediate downside ahead of the 149.30 region and the 149.00 round figure. Some follow-through selling below the 148.65 zone, or the lowest level since December 2024 touched on Monday, would be seen as a fresh trigger for bearish traders. Given that oscillators on the daily chart are holding deep in negative territory, the USD/JPY pair might then decline further towards the 148.00 mark en route to the 147.45 region before eventually dropping to the 147.00 round figure.
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.
