USD/JPY weakens below 155.50 as BoJ's Ueda signals December rate hike

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The USD/JPY pair loses ground to a two-week low around 155.45 during the early Asian session on Tuesday. The Japanese Yen (JPY) edges higher against the US Dollar (USD) following hawkish rhetoric from the Bank of Japan (BoJ) Governor Kazuo Ueda.

USD/JPY softens to near 155.45 in Tuesday’s early Asian session.
BoJ’s Ueda sent a clear hint at the chance of December rate hike.
The US ISM Manufacturing PMI contracted for the ninth straight month in November.

BoJ’s Ueda hinted on Monday that the board might increase interest rates soon, highlighting the possibility of a move at the December policy meeting. Ueda added that delaying the interest rate hike for too long could cause sharp inflation and force the central bank to make rapid policy adjustments.

His hawkish remarks boost the JPY and create a headwind for the pair. Traders are now pricing in about a 76% probability of a rate hike this month, up from around 58% on Friday, according to an index of overnight swaps. The likelihood of a move by January rises to around 94%.

Mounting expectations for a December interest rate reduction by the US Federal Reserve (Fed) after the downbeat US economic data exert some selling pressure on the Greenback. Data released by the Institute for Supply Management (ISM) on Monday showed that the Manufacturing PMI fell to 48.2 in November from 48.7 in October. This figure came in weaker than the expectation of 48.6.

Traders will keep an eye on the ADP Employment Change and US ISM Services Purchasing Managers Index (PMI) reports, which are due on Wednesday. In case of stronger-than-expected outcomes, this could lift the USD against the JPY in the near term.

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.