USD/JPY slides to 156.00; remains close to one-week low amid contrasting BoJ-Fed outlooks

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The USD/JPY pair struggles to capitalize on the previous day's bounce from the 155.65 area, or a one-week low, and meets with a fresh supply during the Asian session on Thursday.

USD/JPY attracts fresh sellers on Thursday and is pressured by a combination of factors.
Intervention fears and reviving BoJ rate hike bets underpin the JPY, weighing on the pair.
Dovish Fed expectations keep the USD depressed and also exert pressure on spot prices.

The USD/JPY pair struggles to capitalize on the previous day's bounce from the 155.65 area, or a one-week low, and meets with a fresh supply during the Asian session on Thursday. Spot prices drop to the 156.00 mark in the last hour and seem poised to prolong a one-week-old retracement slide from the highest level since mid-January, touched last week.

The Japanese Yen (JPY) draws some support from speculations that authorities would step in to stem further weakness in the domestic currency and a relatively hawkish Bank of Japan (BoJ) outlook. In fact, Reuters reported on Wednesday that the BoJ is preparing markets for a possible interest rate hike as soon as next month. This, along with a broadly weaker US Dollar (USD), is seen exerting some downward pressure on the USD/JPY pair.

Investors now seem convinced that the US Federal Reserve (Fed) will lower borrowing costs again at its December meeting. The expectations were reaffirmed by the US Producer Price Index (PPI) on Tuesday, which pointed to signs of cooling inflation. This, to a larger extent, offsets a mixed set of economic indicators released this week and keeps the USD depressed near a one-week low and further contributes to the offered tone surrounding the USD/JPY pair.

However, the prevalent risk-on environment and concerns about Japan's worsening fiscal position, amid Prime Minister Sanae Takaichi’s pro-stimulus stance, could act as a headwind for the safe-haven JPY. Traders might also refrain from placing fresh directional bets around the USD/JPY pair amid relatively thin trading volumes on the back of the Thanksgiving Day holiday in the US. Nevertheless, the fundamental backdrop seems tilted in favor of bearish traders.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

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