USD/JPY rebounds above 155.50 despite BoJ hike prospects

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The USD/JPY pair attracts some buyers to around 155.85, snapping the three-day losing streak during the early Asian session on Wednesday. The US Dollar (USD) recovers some lost ground against the Japanese Yen (JPY) as traders gear up for upcoming key US data releases.

USD/JPY strengthens to near 155.85 in Wednesday’s early Asian session.
Traders are pricing in around an 87% odds of a 25 bps rate cut at the December meeting.
Rising BoJ rate hike expectations could underpin the Japanese Yen and cap the pair’s upside.

The Greenback edges higher amid risk-on sentiment on Wednesday. However, the potential upside seems limited after a report that White House economic adviser Kevin Hassett has emerged as the frontrunner to be the next Federal Reserve (Fed) chair. Hassett is seen as a close ally who supports US President Donald Trump's call for quicker and deeper interest rate reduction to stimulate the economy. This, in turn, could undermine the USD against the JPY.

Furthermore, the weaker-than-expected US Manufacturing PMI released on Monday heaps pressure on the US central bank to cut interest rates this month. Fed funds futures are currently pricing nearly an 87% chance of a 25 basis points (bps) rate cut at the Fed's next meeting on December 10, compared with a 63% odds a month ago, according to the CME FedWatch tool.

Rising Bank of Japan (BoJ) rate hike bets might lift the JPY and act as a headwind for the pair. BoJ Governor Kazuo Ueda reiterated on Monday that the Japanese central bank remains on track to raise interest rates further if prices and the economy continue to unfold as expected. Ueda added that the likelihood of the BoJ’s baseline scenario for growth and inflation being realized is gradually increasing.

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.