Japanese Yen under pressure as Fed rate hike bets push USD/JPY higher

USD/JPY advances, though easing US-Iran tensions may curb safe-haven demand and offset support from elevated US CPI readings.
With underlying inflation reaching the central bank's 2% target, BoJ policymakers called for a quicker pace of rate hikes.
Weak domestic consumption and an uncertain outlook for AI demand prompted several BoJ members to warn against tightening too quickly.

Supported by a firmer US Dollar (USD), USD/JPY trades near 158.90 in Wednesday's Asian session, advancing for a second consecutive day. The latest inflation release reinforced expectations of a Federal Reserve rate hike in December, lending solid support to the Dollar. Markets now assign approximately a 91% probability to a rate increase next month, according to the CME FedWatch Tool.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

October's US Consumer Price Index increased 0.4% month-on-month, exceeding the 0.3% forecast despite easing from the 0.6% rise recorded in September. Excluding food and energy prices, Core CPI climbed 0.3%, above the 0.2% estimate and unchanged from September's pace. Annual figures for October were not included by the Bureau of Labor Statistics because of last year's government shutdown.

Reduced demand for safe-haven assets could nevertheless weigh on the Greenback despite the supportive inflation readings, as expectations build for a diplomatic settlement of the US-Iran conflict. Further military strikes against Iran might no longer be needed, US President Donald Trump indicated. At a G7 meeting, US Secretary of State Marco Rubio also said major combat operations were no longer necessary. Meanwhile, Congressional Democrats are considering using the approaching government funding deadline to push the Trump administration towards a peaceful resolution.

Can Goolsbee’s warning of a ‘real inflation issue’ bolster the Dollar as the Fed turns more hawkish?

An 8/10 FXS Speechtracker score, compared with a historical average of 6.8/10, marked a substantially more hawkish message from the Fed’s Goolsbee and highlighted mounting unease over persistent price pressures. Describing the latest CPI as “borderline disturbing,” he stressed that services inflation was “not coming down,” and warned of “a real inflation issue” that the Fed is “going to have to deal with,” suggesting a lower threshold for further tightening or an extended period of restrictive policy. Such a combination generally favours the Dollar while weighing on risk-sensitive currencies. His repeated warnings about overheating prices and the possibility of inflation expectations becoming entrenched suggest that policy easing will probably be postponed unless fresh data establish a clear trend towards disinflation.

For the Japanese Yen (JPY), the summary of opinions from the Bank of Japan's (BoJ) October meeting showed policymakers favouring faster rate hikes after underlying inflation reached the central bank's 2% target. Expectations of an increase at the December meeting were reinforced by one member's explicit call for the BoJ to deliver its next hike "without becoming overly cautious,". Divisions nonetheless persisted: several members warned against acting too swiftly, pointing to subdued domestic consumption and doubts over whether AI-driven demand could be sustained.

What does the rate spread’s failure to sustain recent highs mean for USD/JPY?

A modest weakening in the rate differential backdrop has drawn attention from analysts at Societe Generale, who observe that "10y UST/JGB spreads narrow to 216bp (-5bp), failing to gain foothold above 220bp." In their view, the spread's fading momentum may help account for USD/JPY's more restrained performance as it consolidates around recent levels before key US data releases.

Japanese Yen: Frequently Asked Questions

Which factors are most important for the Japanese Yen?

Among the world's most actively traded currencies, the Japanese Yen (JPY) draws its value broadly from Japan's economic performance. More specific influences include Bank of Japan policy, the gap between Japanese and US bond yields, and traders' appetite for risk, alongside other factors.

Why do Bank of Japan policy decisions matter for the Japanese Yen?

Currency control forms part of the Bank of Japan's mandate, making its actions an important influence on the Yen. Direct intervention in currency markets has occasionally been used by the BoJ, usually to weaken the Yen. However, political concerns among its main trading partners discourage frequent intervention. Between 2013 and 2024, the BoJ's ultra-loose monetary stance weakened the Yen against its major peers as the policy gap between the Bank of Japan and other leading central banks widened. The gradual withdrawal of that ultra-loose policy has more recently offered the Yen some support.

Why does the gap between Japanese and US bond yields influence the Japanese Yen?

By maintaining ultra-loose monetary policy over the past decade, the BoJ increasingly diverged from other central banks, especially the US Federal Reserve. The resulting widening in the yield gap between 10-year US and Japanese bonds favoured the US Dollar over the Japanese Yen. That differential is now narrowing following the BoJ's 2024 decision to progressively move away from ultra-loose policy, alongside interest-rate cuts by other major central banks.

Why does the Japanese Yen respond to changes in market risk appetite?

Often regarded as a safe-haven investment, the Japanese Yen tends to attract investors during periods of market stress because of its perceived dependability and stability. As a result, market turbulence is likely to lift the Yen against currencies considered riskier investments.