159.00 in sight for yen as Treasury yields return above 5%

159.00 in sight as USD/JPY climbs to its strongest since mid-October.
Despite broad support for further rate rises in a BoJ meeting summary, the Yen weakens.
1.3% September rise precedes Friday’s October US producer price release.

5% is the annual return on new US 10-year notes sold on Tuesday, the highest since 2006. Against the Dollar, the Yen has weakened to its lowest since mid-October. Trading just below 159.00 Yen, the Dollar has more than recovered Monday’s decline and regained ground above Friday’s closing level.

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

October’s consumer price data indicate that inflationary pressures may endure and inflation is not trending lower, according to Fed Vice Chair for Supervision Bowman. At 3.75%-4.00%, the Fed’s rate range exceeds the Bank of Japan (BoJ) rate of 1.25% by 2.50-2.75 percentage points. A Dollar deposit therefore offers roughly that much more interest than a Yen deposit.

Released on Tuesday, the summary of the BoJ’s October meeting showed broad agreement among members on the need for further rate increases. That did not prevent the Yen from declining. An expected BoJ hike to 1.50% on 18 December would follow a Fed move to 4.00%-4.25% nine days earlier, keeping the rate differential unchanged.

6.6% US producer price forecast leads the data calendar

Thursday’s US weekly jobless claims release at 13:30 GMT is expected to show 195K, compared with 189K. October US producer prices follow on Friday at 13:30 GMT, with annual growth forecast at 6.6%, up from 6.3%. Both releases have implications for how far US interest rates rise above Japan’s.

At 23:50 GMT on Wednesday, Japan will publish October producer prices. The forecast is for a 6.5% year-on-year increase, following 6.8%. The release is among Japan’s final price reports ahead of the BoJ’s 17-18 December meeting, at which most economists anticipate a rate rise to 1.50%.

156.00 marks the lower end of USD/JPY’s range

Since 24 September, the Dollar has traded in a range against the Yen whose lower boundary is the 23 October low near 156.00. It now sits at the upper end. The range remains well beneath both the late-July peak around 164.00 and the 2 September high near 160.50.

Daily price chart: USD/JPY

Japanese Yen: key questions answered

Main drivers of the Japanese Yen

Among the world’s most actively traded currencies, 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.

Bank of Japan decisions shape the Yen’s direction

Currency control is part of the Bank of Japan’s mandate, making its actions important for the Yen. At times, the BoJ has intervened directly in foreign exchange markets, usually to weaken the currency. Political concerns among Japan’s main trading partners, however, discourage frequent intervention. From 2013 to 2024, the BoJ’s ultra-loose monetary stance drove Yen depreciation against its major currency peers as policy increasingly diverged from that of other leading central banks. More recently, a gradual withdrawal of this ultra-loose policy has provided the Yen with some support.

10-year US-Japan yield gap influences the Yen

By maintaining ultra-loose monetary policy over the past decade, the BoJ moved further apart from other central banks, notably the US Federal Reserve. This helped widen the yield gap between 10-year US and Japanese bonds, supporting the US Dollar against the Japanese Yen. That differential is now narrowing as the BoJ gradually exits ultra-loose policy following its 2024 decision, while other major central banks cut interest rates.

Risk sentiment shapes demand for the Japanese Yen

Investors often regard the Japanese Yen as a safe-haven asset. When markets come under stress, its perceived reliability and stability make them more inclined to hold the Japanese currency. As a result, periods of turbulence are likely to lift the Yen against currencies considered riskier investments.