Japanese Yen drifts lower as traders await the highly-anticipated BoJ decision
- The Japanese Yen bulls opt to lighten their bets ahead of the crucial BoJ policy decision.
- Japan's core inflation accelerates in December and lifts bets for a BoJ interest rate hike.
- The US Dollar hangs near the monthly low set this week and could cap the USD/JPY pair.
The Japanese Yen (JPY) ticks lower during the Asian session on Friday amid some repositioning ahead of the highly-anticipated Bank of Japan (BoJ) policy decision. The downside for the JPY, however, seems cushioned amid firming expectations that the BoJ will hike interest rates amid signs of broadening inflationary pressures in Japan. In fact, government data released earlier today showed that Japan's core consumer prices rose at the fastest annual pace in 16 months. Moreover, a core reading that excludes both fresh food and energy prices remained above the BoJ’s 2% annual target for a fourth straight month.
Meanwhile, the prospects for further policy tightening by the BoJ and bets that the Federal Reserve (Fed) will cut interest rates twice this year could narrow the US-Japan rate differential. Apart from this, worries about US President Donald Trump's trade policies should continue to act as a tailwind for the JPY. The US Dollar (USD), on the other hand, languishes near the monthly low amid concerns over the implications of a Fed-Trump policy clash on interest rates. This, in turn, favors the USD bears and might further contribute to keeping a lid on any meaningful upside for the USD/JPY pair.
Japanese Yen struggles to lure buyers despite stronger domestic CPI; focus remains on BoJ
- Data released by the Japan Statistics Bureau this Friday showed that the National Consumer Price Index (CPI) climbed 3.6% YoY 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 its highest level since mid-2023.
- Adding to this, a core reading, which strips out the effect of both fresh food and energy prices, remained steady and rose 2.4% in December from a year earlier amid strong private consumption.
- This, along with expectations that annual springtime wage negotiations would yield bumper wage hikes again 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 the 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 straight month in January, while services sector activity picked up.
- Meanwhile, US President Donald Trump, speaking remotely at the World Economic Forum in Davos, said on Thursday that he will apply pressure on the Federal Reserve to bring down interest rates.
- This comes on top of signs of easing inflationary pressures in the US and reaffirms bets that the Fed will lower borrowing costs twice this year, which keeps the US Dollar close to the monthly low.
- Traders on Friday will also confront the release of flash PMIs, which could provide a fresh insight into the global economic health and might influence demand for the safe-haven Japanese Yen.
USD/JPY bears need to wait for a sustained break and acceptance below ascending channel support
From a technical perspective, the USD/JPY pair, so far, has managed to defend support marked by the lower end of a multi-month-old ascending channel, currently pegged near the 155.35 area. This is closely followed by the 155.00 psychological mark and the 154.80-154.75 region, or over a one-month low touched on Tuesday. Some follow-through selling below the latter will be seen as a fresh trigger for bearish traders and drag spot prices to the 154.00 round figure en route to the mid-153.00s and the 153.00 mark.
On the flip side, the overnight swing high, around the 156.75 area, could offer some resistance ahead of the 157.00 round figure. A sustained strength beyond the latter should pave the way for a further move up towards the 157.55 area en route to the 158.00 mark. The 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 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.