- Japanese Yen bulls choose to lighten their bets ahead of the BoJ’s crucial policy decision.
- Japan’s core inflation accelerates in December, raising bets on a BoJ rate hike.
- The US dollar remains near the monthly low set this week and could cap the USD/JPY pair.
The Japanese Yen (JPY) declines during the Asian session on Friday amid some repositioning ahead of the Bank of Japan’s (BoJ) long-awaited policy decision. However, the JPY’s decline appears to be cushioned by firm expectations that the BoJ will raise interest rates amid signs of widening inflationary pressures in Japan. In fact, government data released today showed that Japan’s core consumer prices rose at the fastest annual pace in 16 months. Additionally, an underlying reading excluding both fresh food and energy prices remained above the BoJ’s 2% annual target for the fourth consecutive month.
Meanwhile, prospects of further policy tightening by the BoJ and bets that the Federal Reserve (Fed) will cut interest rates twice this year could narrow the rate differential between the US and Japan. In addition to this, concerns over US President Donald Trump’s trade policies should continue to act as a tailwind for the JPY. On the other hand, the US Dollar (USD) languishes near the monthly low amid concerns about the implications of a policy clash between the Fed and Trump on interest rates. This, in turn, favors USD bears and could further help keep any significant rise in the USD/JPY pair at bay.
Japanese Yen Struggles to Attract Buyers Despite Stronger Domestic CPI; the focus remains on the BoJ
- Data released by Japan’s Statistics Bureau on Friday showed that the National Consumer Price Index (CPI) rose 3.6% year-on-year in December, compared to the previous month’s reading of 2.9%.
- Further details of the report revealed that Japan’s core consumer prices rose in line with expectations, from 2.7% to 3.0% during the reported month, marking their highest level since mid-2023.
- Furthermore, an underlying reading, which excludes the effect of fresh food and energy prices, remained stable and rose 2.4% in December compared to a year earlier amid strong private consumption.
- This, along with expectations that the annual spring wage negotiations will again produce significant wage increases in 2025, gives the Bank of Japan more impetus to raise interest rates further.
- The BoJ is scheduled to announce its decision at the end of a two-day policy meeting this Friday and is widely expected to raise short-term interest rates from 0.25% to a 17-year high of 0.50%.
- The preliminary Purchasing Managers’ Index (PMI) showed that manufacturing activity in Japan contracted for the seventh consecutive month in January, while service sector activity rose.
- Meanwhile, US President Donald Trump, speaking remotely at the World Economic Forum in Davos, said on Thursday he will pressure the Federal Reserve to cut interest rates.
- This adds to signs of easing inflationary pressures in the US and reaffirms bets that the Fed will reduce borrowing costs twice this year, keeping the US dollar near the monthly low.
- Traders will also face the release of preliminary PMIs on Friday, which could provide new insight into global economic health and could influence demand for the safe-haven Japanese Yen.
USD/JPY Bears Need to Wait for a Sustained Breakout and Acceptance Below Ascending Channel Support
From a technical perspective, the USD/JPY pair has so far managed to defend support marked by the lower end of a multi-month ascending channel, currently situated near the 155.35 area. This is closely followed by the 155.00 psychological level and the 154.80-154.75 region, or a more than one-month low touched on Tuesday. Some continuation selling below the latter will be considered a new trigger for the bears and will drag the spot prices to the round figure of 154.00 en route towards the 153.50 area and the 153.00 level.
On the upside, the overnight high around the 156.75 area could offer some resistance before the round 157.00 figure. Sustained strength beyond the latter should pave the way for a further move towards the 157.55 area en route towards the 158.00 level. Momentum could extend further towards the 158.35-158.40 region, above which the USD/JPY pair could retest the multi-month peak, around the 159.00 neighborhood touched on January 10.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets the country’s monetary policy. Its mandate is to issue banknotes and carry out monetary and currency control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked on ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low inflation environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing of banknotes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further relaxed policy by first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds.
The Bank of Japan’s massive stimulus has caused the Yen to depreciate against its major currency pairs. This process has been exacerbated more recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat inflation levels that have been at record highs for decades. The Bank of Japan’s policy of keeping rates low has caused the differential with other currencies to increase, dragging down the value of the Yen.
The weakness of the Yen and the rebound in global energy prices have caused a rise in Japanese inflation, which has exceeded the 2% target set by the Bank of Japan. Even so, the Bank of Japan judges that sustainable and stable achievement of the 2% objective is still not in sight, so a sudden change in current monetary policy seems unlikely.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
