USD/JPY trades higher to near 156.50 while focus shifts to US NFP data

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The USD/JPY pair trades marginally higher to near 156.50 during the European trading session on Tuesday.

USD/JPY rises to near 156.50 as the US Dollar recovers its early losses.
Investors await the US NFP data for fresh cues on the Fed’s monetary policy outlook.
BoJ’s Ueda signals that there will be more interest rate hikes this year.

The USD/JPY pair trades marginally higher to near 156.50 during the European trading session on Tuesday. The pair gains as the US Dollar recovers its early losses and turns marginally positive, with investors shifting focus to the United States (US) Nonfarm Payrolls (NFP) data for December that will be released on Friday.

As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades slightly higher to near 98.45.

Earlier in the day, the US Dollar underperformed as market sentiment remained favorable for riskier assets. Sentiment turned risk-on as investors digested market jitters stimulated by the United States (US) military action in Venezuela.

Going forward, investors will pay close attention to the US NFP data as the latest commentaries from Federal Reserve (Fed) officials have signaled that they are concerned about downside labor market risks rather than fears of inflation pressures remaining persistent.

Ahead of the US NFP data, investors will focus on the US ADP Employment Change and ISM Services PMI data for December, and the JOLTS Job Openings data for November.

Meanwhile, the Japanese Yen (JPY) is broadly underperforming even as Bank of Japan (BoJ) Governor Kazuo Ueda has signaled that there will be more interest rate hikes in the near term. “BoJ expected to continue raising interest rates if economy and prices move in line with our forecast,” Governor Ueda said on Monday, and added that adjusting the degree of monetary support will help achieve “sustained growth and stable inflation”.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.