Japanese Yen continues to weaken despite Bank of Japan being set to raise rates in December

Pressure on the Japanese Yen (JPY) persists near multi-month lows, with USD/JPY trading above 160.00 for a second successive session and drawing warnings from Japanese Finance Minister Katayama about rapid, one-sided foreign exchange movements. Projected Q3 real GDP growth of 0.8% QoQ saar points to resilient domestic activity, while inflation above target strengthens expectations of a 25 bps Bank of Japan (BoJ) rate increase in December. However, firmer expectations for Federal Reserve (Fed) tightening are offsetting that domestic policy support. Strategists at DBS Group Research, Societe Generale, and Commerzbank are weighing whether technical breaks above 160.00 will prolong near-term Yen weakness towards 162.20, or whether changes in Japan’s interest rate landscape will underpin a longer-term JPY recovery.

DBS sees firm growth and above-target inflation supporting December BoJ rate rise

Japan’s third-quarter real GDP is forecast to rise by 0.8% QoQ saar, according to economists at DBS Group Research, with AI-related export demand and wage-driven household consumption supporting activity. Their October trade projections nevertheless point to a wider deficit of JPY1.2 trillion, even as exports grow by 17% YoY. Alongside this, persistently above-target inflation, fuelled by higher energy costs and Yen weakness, should strengthen the argument for a 25 bps Bank of Japan rate increase in December.

"Real GDP is expected to expand by 0.8% qoq saar in 3Q, broadly in line with trend... October trade data are likely to show export growth remaining solid at 17% yoy, but the trade deficit widening to JPY1.2tn... Overall, these data should reinforce the case for a 25bp BOJ rate hike at the December policy meeting, with growth around trend, inflation above target, and continued pressure on external balance/exchange rate."

USD/JPY break above 160 threatens further Yen weakness towards 162.20, Societe Generale warns

A break above the top of USD/JPY’s tight consolidation range and a recovery above its 200-day moving average have been highlighted by Kenneth Broux and colleagues at Societe Generale. The pair traded above 160.00 for a second consecutive day, although verbal warnings from Finance Minister Katayama subsequently restrained the advance. Initial support lies at the 200-day SMA around 158.70; a sustained rise would leave the Japanese Yen exposed to key resistance at 160.40/160.70 and 162.20.

"USD/JPY witnessed a sharp rebound in September and evolved within a narrow consolidation. It has now broken out above the upper limit of this rang denoting possibility of extension in bounce. The next potential hurdles could be located at April high of 160.40/160.70 and projections near 162.20... The pair has reclaimed the 200-DMA. If a short-term pullback develops, the moving average at 158.70 could be an important support... USD/JPY: 159.66 - 160.19 overnight range. Spot trades through 160 for second day before traders pare back on warning by FinMin Katayama one-sided action and rapid forex moves. Support 158.70, resistance 160.70."

Fed-BoJ policy convergence limits near-term Yen gains ahead of structural recovery, Commerzbank says

Expectations of another Federal Reserve rate increase in March offset the currency effects of anticipated Bank of Japan rises in December and next spring, argues Volkmar Baur at Commerzbank. In the bank’s view, simultaneous tightening points to convergence between the central banks rather than divergence, leaving little scope for near-term Japanese Yen appreciation. Its forecast is therefore for only a modest strengthening towards 155.00 by mid-2027, before structurally more appealing domestic bond yields underpin a sustained JPY recovery over the longer term.

"This reassessment of our US central bank expectations naturally impacts our forecast for the Japanese yen as well. Our economists no longer expect the US central bank to halt its interest rate hikes in December. Instead, they have factored in a further rate rise by the Fed in March... While we also expect the Bank of Japan to implement two further rate rises - in December and in spring next year - this no longer favours the Japanese yen. Rather, it signals a convergence between the central banks, which will likely have little impact on the currency... Consequently, we see little potential for the Japanese yen in the near future. In recent days, the yen has already weakened slightly due to rising market expectations regarding the Fed, and is currently trading just below USD-JPY 160. By the middle of next year, we now expect only a slight appreciation towards 155... In the longer term, however, we continue to expect the JPY to strengthen. The structural shift in Japan’s interest rate landscape means that domestic bonds are once again significantly more attractive, particularly for Japanese investors."

Yen remains caught between domestic support and external rate pressure

Trend GDP growth of 0.8% QoQ saar and persistent inflation are strengthening Japan’s domestic economic backdrop, but external interest rate pressures continue to weigh on the Japanese Yen around 160.00. For DBS Group Research, those growth and inflation conditions provide firm grounds for a 25 bps BoJ rate increase in December. By contrast, Societe Generale cautions that USD/JPY’s technical break above its 200-day SMA at 158.70 leaves the Yen exposed to tests of 160.40/160.70 and 162.20, unless official intervention checks the advance. Meanwhile, Commerzbank stresses that concurrent Federal Reserve tightening into March will limit near-term JPY appreciation to around 155.00. A more lasting Yen recovery would be deferred until higher Japanese bond yields draw sustained domestic capital inflows over the longer term.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)