Yen weakens towards 160.00 as markets await Fed speakers and US PPI

USD/JPY reaches its strongest level since 2 September after escaping a seven-week trading range.
The interest-rate differential would remain intact if the Fed and BoJ deliver the expected December hikes.
October producer price data from Japan precede Friday's US release.

USD/JPY is within striking distance of 160.00 for the first time since early September, as markets await Fed commentary and US producer price data before the weekend. Having broken free of its seven-week trading range, the pair climbed to just below 160.00, its strongest level since 2 September. It now trades slightly off that peak, close to the upper end of Wednesday's range.

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

Expectations of a Fed rate hike strengthened after the October Consumer Price Index (CPI) rose 0.4%, exceeding forecasts, and Fed Governor Waller described an increase at the 8-9 December meeting as likely. Futures markets now assign a probability of nearly 90% to a quarter-point hike at that meeting. With the Fed's rate at 3.75%-4.00% and the Bank of Japan's (BoJ) at 1.25%, the differential of at least two and a half points rewards investors holding Dollars rather than Yen.

Expectations also point to a BoJ hike. In October's 8-1 decision, BoJ board member Takata voted for a rate of 1.50%; most economists anticipate that the remaining members will back that level at the 17-18 December meeting. If both central banks raise rates by a quarter-point, nine days apart, neither the differential nor the incentive to hold Dollars instead of Yen would change.

Which releases are next on the calendar?

Two Japanese releases will inform the BoJ's December decision, which determines the Japanese side of the rate differential. October corporate goods prices are scheduled for 23:50 GMT on Wednesday, followed by third-quarter Gross Domestic Product (GDP) at 23:50 GMT on Sunday.

Thursday's US jobless claims release is due at 13:30 GMT, with a forecast of 195K compared with 189K. At 14:00 GMT, Cleveland Fed President Hammack begins a sequence of six Fed speeches that day. Friday brings October's US Producer Price Index (PPI) at the same hour; a rise of 0.4% is forecast, against September's 1.3%. A quarter-point Fed hike is already priced in, leaving both releases relevant to the possibility of a half-point increase.

What does the chart show?

Having cleared the 156.00-159.00 band that contained trading since late September, USD/JPY has retraced almost the entire decline from the 2 September high near 160.50 to September's low around 153.00. Its previous two moves above 160.00, at the end of July and the beginning of September, were each followed by a drop of more than five Yen within a week.

Daily price chart: USD/JPY

Japanese Yen: Common Questions

Which factors have the greatest influence on the Japanese Yen?

Among the most actively traded currencies globally, the Japanese Yen (JPY) broadly reflects the performance of Japan's economy. 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 decisions matter for the Japanese Yen?

Currency control is among the Bank of Japan's mandates, making its actions important for the Yen. Although the BoJ has occasionally intervened directly in currency markets, usually to weaken the Yen, political concerns among its main trading partners discourage frequent intervention. Between 2013 and 2024, its ultra-loose monetary stance weakened the Yen against major currency peers as policy increasingly diverged from that of other leading central banks. The gradual withdrawal of this ultra-loose policy has more recently provided the Yen with some support.

Why does the US-Japan bond yield gap affect the Japanese Yen?

By maintaining ultra-loose monetary policy over the last decade, the BoJ allowed its policy stance to diverge increasingly from those of other central banks, particularly the US Federal Reserve. That divergence helped widen the yield gap between 10-year US and Japanese bonds, supporting the US Dollar against the Japanese Yen. The differential is now narrowing following the BoJ's 2024 decision to gradually move away from ultra-loose policy, alongside interest-rate cuts by other major central banks.

Why does market risk sentiment influence the Japanese Yen?

Investors often regard the Japanese Yen as a safe-haven investment, making them more inclined to place funds in the currency during periods of market stress because of its perceived reliability and stability. As a result, market turbulence is likely to lift the Yen against currencies viewed as riskier investments.