USD/JPY picks up, nears 156.50 unfazed by BoJ tightening speculation

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The Yen is showing the weakest performance of the G8 currencies on Wednesday, which is supporting the USD/JPY to trim previous losses and return to levels near 156.50.

The US Dollar reaches the mid-range of the 156.00s after bouncing from 155.65.
A Reuters report suggests that the BoJ is preparing markets for an upcoming rate hike.
In the US, recent data has heightened hopes of Fed rate cuts in December.

The Yen is showing the weakest performance of the G8 currencies on Wednesday, which is supporting the USD/JPY to trim previous losses and return to levels near 156.50. Heightened expectations that the Bank of Japan (BoJ) might raise interest rates in the coming months have failed to provide any significant support to the Yen.

A report released by Reuters earlier on Wednesday affirms that the BoJ is preparing markets for a potential interest rate hike, which might come as early as next month, as concerns about the economic consequences of a weak Yen have offset the Japanese cabinet’s reluctance towards monetary tightening.

Yen intervention looming

The Japanese Yen has depreciated nearly 5% from early October, when the pro-stimulus Prime Minister Sanae Takaichi came into power, and more than 10% since Trump announced trade tariffs in April. This decline has forced the Japanese authorities to warn about a potential intervention to stem Yen weakness, which might take place during the US Thanksgiving festivities, in the last half of the week.

The Japanese calendar has been thin so far, and investors are looking to the advanced Tokyo CPI figures for November, which are due on Thursday, for confirmation of the BoJ’s interest rate calendar. The market consensus points to a moderating consumer inflation.

In the US, September’s delayed Retail Sales figures showed weaker-than expected consumption figures, while producer prices steadied and consumer confidence deteriorated. These data come after the dovish comments by Federal Reserve officials Waller and Williams, and have contributed to boosting bets for Fed easing in December, therefore, adding pressure on the USD.

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.