USD/JPY gains ground above 153.50 on BoJ rate hike uncertainty

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The USD/JPY pair trades in positive territory near 153.70 during the early Asian session on Monday. The Japanese Yen (JPY) retreats from an over one-week high amid the uncertainty over the timing of the next interest rate hike by the Bank of Japan (BoJ).

USD/JPY strengthens to around 153.70 in Monday’s early Asian session.
BoJ rate hike uncertainty could weigh on the Japanese Yen.
The UoM Consumer Sentiment Index dropped to 50.3 in November, the lowest level since June 2022.

Japan's new Prime Minister Sanae Takaichi is reportedly looking to finalize an economic stimulus package of around $65 billion to address inflation and growth by late November and pass a supplementary budget to fund it. Additionally, the Japanese central bank remains reluctant to commit to further rate hikes.

Nonetheless, Minutes from the BoJ’s September meeting revealed that an increasing number of policymakers at the central bank believed that conditions were falling into place for interest rates to rise, with two members calling for an immediate hike. Board members noted that the BoJ may be able to return to a stance of raising interest rates, as the 2% price stability target has been more or less achieved.

US consumer sentiment was near a three-and-a-half-year low as the government shutdown fuels anxiety, which could exert some selling pressure on the Greenback against the JPY. The University of Michigan (UoM) reported on Friday that its Consumer Sentiment Index declined to 50.3 in November, the lowest level since June 2022, from a final reading of 53.6 in October. This figure came in weaker than the expectation of 53.2.

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.