Japanese Yen struggles to lure buyers amid rebounding US bond yields, modest USD uptick

• The Japanese Yen retreats from over a one-month high touched against the USD on Wednesday.
• Rebounding US bond yields help revive the USD demand and undermine the lower-yielding JPY.
• December BoJ rate hike bets, trade war jitters and geopolitical risks could limit losses for the JPY.

The Japanese Yen (JPY) weakens across the board on Thursday, which, along with reviving US Dollar (USD) demand, lifts the USD/JPY pair away from a five-week low touched the previous day and above mid-151.00 during the Asian session. The US macro data released on Wednesday pointed to a still resilient US economy and stalling inflation progress, suggesting that the Federal Reserve (Fed) might be cautious on further rate cuts. This, in turn, triggers a fresh leg up in the US Treasury bond yields, which assists the USD to rebound from a two-week low and drives flows away from the lower-yielding JPY. 

Apart from this, a generally positive risk tone is seen as another factor undermining the safe-haven JPY, though speculation that the Bank of Japan (BoJ) may hike interest rates again in December could limit further losses. Furthermore, concerns about the economic impact of US President-elect Donald Trump's tariff plans, along with persistent geopolitical risks stemming from the Russia-Ukraine war, offer some support to the JPY. Traders also seem reluctant to place aggressive bets amid relatively thin trading volumes on the back of a holiday in the US and ahead of Tokyo's consumer inflation figures on Friday. 

Japanese Yen is pressured by a combination of factors, though downside seems limited

• Japan’s stronger Consumer Price Index and steady corporate service inflation reaffirmed Bank of Japan Governor Kazuo Ueda's view that the economy was progressing towards sustained wages-driven inflation.
• This keeps the door open for another BoJ interest rate hike in December, which, along with trade war jitters, lifted the safe-haven Japanese Yen to a five-week high against its American counterpart on Wednesday. 
• Japan's parliament convened an extraordinary session, with Prime Minister Shigeru Ishiba's minority government seeking to enact a supplementary budget to help inflation-hit households and revise a political funds law.
• The flight to safety and expectations that Scott Bessent – Trump's US Treasury secretary nominee – will restrain budget deficits dragged the benchmark 10-year US Treasury yields to a level not seen in a month.
• The US Dollar recovers from a two-week low touched on Wednesday amid a pickup in the US bond yields, bolstered by Wednesday's US macro data, which underscored the US economic resilience and a solid labor market.
• The Bureau of Economic Analysis reported that the economy expanded steadily in the third quarter, by a 2.8% annualized pace – matching the first estimate – and consumer spending rose 3.5% – the most this year.
• Meanwhile, data released by the US Department of Labor showed that the number of individuals filing new applications for unemployment insurance fell to 213K for the week ending November 22 from 215K prior.
• Separately, Durable Goods Orders climbed 0.2% in October as compared to the 0.4% decline (revised from -0.8%) recorded in the previous month and was worse than the consensus estimates for an increase of 0.5%.
• Furthermore, the Personal Consumption Expenditures (PCE) Price Index rose to 2.3% on a yearly basis in October from 2.1% in September and the core gauge edged higher from 2.7% to 2.8% during the reported month.
• The data did little to bolster the case for the Federal Reserve to ease again next month, although market participants are pricing in over a 65% chance of another 25-basis points rate cut at the December FOMC meeting. 
• However, expectations that Trump's expansionary policies will boost inflation and limit the scope for the Fed to cut rates further lend support to the USD and contribute to the USD/JPY pair's move up on Thursday. 
• Trading volumes are expected to remain thin on the back of the Thanksgiving Day holiday in the US, warranting some caution for aggressive traders ahead of the Tokyo consumer inflation figures on Friday. 

USD/JPY needs to move back above the 200-day SMA for bulls to regain near-term control

The overnight breakdown below the very important 200-day Simple Moving Average (SMA) could be seen as a key trigger for bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and support prospects for further USD/JPY depreciation. That said, a modest recovery from the vicinity of the 38.2% Fibonacci retracement level of the September-November rally warrants some caution. Any further move up, however, is more likely to remain capped near the 152.00 mark (200-day SMA), above which spot prices could climb to the 152.60 area, en route to the 153.00 mark and the 153.30 horizontal barrier. 

On the flip side, the overnight swing low, around the 150.45 area, closely followed by the 150.20-150.15 region (38.2% Fibo. level) and the 150.00 psychological mark now seem to act as immediate support levels. A convincing break below the latter has the potential to drag the USD/JPY pair to the 149.40-149.35 intermediate support en route to the 149.00 round figure and the 50% retracement level, around the 148.25-148.20 zone.

Bank of Japan FAQs

What is the Bank of Japan?

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%.

What has been the Bank of Japan’s policy?

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.

How do Bank of Japan’s decisions influence the Japanese Yen?

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.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

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.

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