Japanese Yen edges higher vs. USD on BoJ-Fed policy divergence; lacks bullish conviction

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The USD/JPY pair struggles to capitalize on the previous day's positive move and attracts some intraday sellers near the 153.75 resistance zone during the Asian session on Tuesday.

USD/JPY meets with a fresh supply on Tuesday and stalls the previous day’s positive move.
The divergent BoJ-Fed expectations offer some support to the JPY amid intervention fears.
The USD struggles to lure buyers and contributes to the pair’s slide during the Asian session.

The USD/JPY pair struggles to capitalize on the previous day's positive move and attracts some intraday sellers near the 153.75 resistance zone during the Asian session on Tuesday. Spot prices touch a fresh daily low around the 153.25-153.20 area in the last hour, though the downtick lacks bearish conviction.

Traders remain on high alert amid the possibility of a coordinated Japan-US intervention to stem weakness in the Japanese Yen (JPY). Moreover, the diverging interest rate paths between the Bank of Japan (BoJ) and the US Federal Reserve (Fed) contribute to capping the upside for the USD/JPY pair. However, Monday's disappointing release of Japan's Q4 GDP might have reduced urgency for the BoJ to tighten further, which might hold back the JPY bulls from placing aggressive bets.

Adding to this, the prevailing risk-on environment might keep a lid on the safe-haven JPY and act as a tailwind for the USD/JPY pair. That said, any meaningful appreciation for the currency pair still seems elusive as dovish Fed expectations, along with threats to the central bank's independence, fail to assist the US Dollar (USD) in attracting any meaningful buyers. Traders might also opt to wait for more cues about the Fed's rate-cut path before positioning for the next leg of a directional move.

Hence, the focus will remain glued to the release of the FOMC minutes on Wednesday. This week's US economic docket also features Durable Goods Orders and housing market data. Apart from this, the global flash PMIs and speeches from influential FOMC members could provide some meaningful impetus to the USD/JPY pair during the latter part of the week. Nevertheless, the broader fundamental backdrop suggests that the path of least resistance for spot prices is to the downside.

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.