Japanese Yen sticks to modest intraday gains against USD; BoJ uncertainty caps gains

• The Japanese Yen attracts some haven flows on Tuesday, albeit lacking follow-through.
• The BoJ rate-hike uncertainty acts as a headwind for the JPY amid renewed USD buying.
• A fresh leg up in the US bond yields also contributes to capping the lower-yielding JPY.

The Japanese Yen (JPY) remains on the front foot against its American counterpart during the Asian session on Tuesday, albeit it lacks bullish conviction amid doubts over the Bank of Japan's (BoJ) ability to hike interest rates further. Investors now seem convinced that increased political uncertainty in Japan could restrict the BoJ from tightening its monetary policy. This, along with the underlying bullish sentiment surrounding the equity markets, continues to act as a headwind for the safe-haven JPY. 

Meanwhile, expectations that US President-elect Donald Trump’s expansionary policies will reignite inflation and force the Federal Reserve (Fed) to cut interest rates slowly trigger a fresh leg up in the US Treasury bond yields. This, in turn, assists the US Dollar (USD) in filling the weekly bearish gap and contributes to capping the lower-yielding JPY. That said, Trump's tariff threats drive some haven flows towards the JPY and keep the USD/JPY pair offered below the 154.00 round-figure mark. 

Japanese Yen attracts some haven flow in reaction to Trump's tariff threats

• Data published by the Bank of Japan this Tuesday showed that the Services Producer Price Index (PPI) rose 2.9% YoY in October as compared to 2.6% in the previous month.
• This comes after last week's stronger consumer inflation figures from Japan and BoJ Governor Kazuo Ueda's hawkish remarks and keeps the door open for a December rate hike.
• BoJ Governor Kazuo Ueda has stressed the bank's readiness to raise interest rates again if inflation becomes driven more by robust domestic demand and higher wages.
• Meanwhile, investors have been scaling back their bets for another 25-basis-points rate by the BoJ in December in the wake of increased domestic political uncertainty. 
• US President-elect Donald Trump said that he will charge Mexico and Canada a 25% tariff on all products coming into the US and will charge China an additional 10% tariff.
• Concerns about the economic impact of increased duties temper investors' appetite for riskier assets and drive some haven flows towards the Japanese Yen on Tuesday.
• The yield on the benchmark 10-year US government bond fell by the most since early August on Monday in response to Scott Bessent's nomination as the US Treasury secretary.
• Chicago Fed President Austan Goolsbee said on Monday that barring some convincing evidence of overheating, he foresees the central bank continuing to lower rates. 
• Separately, Minneapolis Fed President Neel Kashkari said that it is still appropriate to consider another interest-rate reduction at the December FOMC policy meeting.
• Traders have been paring back their expectations for an interest-rate cut by the Federal Reserve in December amid concerns that Trump's policies could boost inflation.
• The US Dollar regains positive traction following the previous day's slide amid a fresh leg up in the US bond yields, which, in turn, should cap the lower-yielding JPY. 
• Traders now look forward to the release of the FOMC meeting minutes for cues about the future rate-cut path and determining the near-term trajectory for the Greenback. 
• This week's US economic docket also features the first revision of the US Q3 GDP print and the US Personal Consumption and Expenditure (PCE) price Index. 

USD/JPY acceptance below 100-period SMA on H4 favors bearish traders

The USD/JPY pair has been consolidating near the 100-period Simple Moving Average (SMA) on the 4-hour chart. Moreover, mixed oscillators on daily and hourly charts make it prudent to wait for some follow-through selling below last week's swing low, around the 153.30-153.25 region, before positioning for any further losses. Spot prices might then weaken further below the 153.00 mark, towards the next relevant support near mid-152.00s en route to the very important 200-day SMA, currently around the 152.00 mark.

On the flip side, the 154.75-154.80 area now seems to have emerged as an immediate strong barrier. A sustained move beyond, leading to a subsequent strength above the 155.00 psychological mark, could lift the USD/JPY pair to the 155.40-155.50 supply zone. The momentum could extend further towards reclaiming the 156.00 mark before spot prices aim to retest the multi-month top, around the 156.75 region touched on November 15.

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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