Japanese Yen's Weakness Amid Risk-On Sentiment and Fiscal Concerns
The Japanese Yen (JPY) has been under pressure throughout the Asian session on Friday, despite limited downside potential. Investors are grappling with Japan's deteriorating fiscal health, exacerbated by Prime Minister Sanae Takaichi's ambitious spending plan and sluggish economic growth. Moreover, the prevailing risk-on environment is undermining the JPY's safe-haven status.
However, rising expectations for an imminent rate hike by the Bank of Japan (BoJ) as early as next week might deter aggressive JPY bearish bets. Investors are also choosing to remain on the sidelines, awaiting the outcome of the December 18-19 BoJ policy meeting, which could provide a fresh impetus to the JPY. The US Dollar (USD), on the other hand, is languishing near a two-month low, touched on Thursday, due to rising bets for more interest rate cuts by the Federal Reserve (Fed). This divergence from the BoJ's hawkish stance is expected to support the lower-yielding JPY and limit the USD/JPY pair's recovery from sub-155.00 levels.
Positive Risk Tone and Fiscal Worries Undermine Japanese Yen
- Asian stocks advanced on Friday, mirroring Wall Street's overnight strength, and traditional safe-haven assets are under pressure. Concerns about Japan's public finances, driven by Prime Minister Sanae Takaichi's reflationary policies, are keeping the JPY weak during the Asian session.
- The Corporate Goods Price Index, released on Wednesday, revealed that inflation in Japan remains above historic levels, validating the BoJ Governor Kazuo Ueda's hawkish view. This supports the case for further BoJ policy normalization, and traders are cautious about aggressive JPY bearish bets ahead of the December 18 BoJ meeting.
- The US Federal Reserve's 25-basis-point rate cut on Wednesday, coupled with a projection of just one more rate cut in 2026, has kept the USD bearish sentiment in check. Investors are hopeful about two more rate cuts in 2026, following Fed Chair Jerome Powell's dovish remarks.
- Powell's post-meeting press conference highlighted significant downside risks to the US labor market, keeping the USD near a two-month low. This should act as a headwind for the USD/JPY pair.
- Traders are now awaiting speeches from influential FOMC members, as economic releases from the US are scarce. The focus, however, remains on the BoJ's monetary policy meeting next week.
USD/JPY Bulls Await Sustained Move Beyond 156.00
- From a technical perspective, the overnight swing high above 156.00 could be an immediate hurdle for the USD/JPY pair. A sustained move beyond this level might trigger short-covering, pushing spot prices to the 157.00 neighborhood or the weekly high. Follow-through buying should pave the way for gains towards the 157.45 intermediate hurdle, en route to a multi-month top around 158.00, touched in November.
- Bearish traders might wait for acceptance below 155.00 before placing fresh bets. The pair could then accelerate its fall, retesting the monthly trough at 154.35, followed by the 154.00 round figure. Spot prices might slide to the 153.60 region or even drop below 152.00.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the country's central bank, responsible for monetary policy, including issuing banknotes and currency control to ensure price stability, with an inflation target of around 2%.
In 2013, the BoJ embarked on an ultra-loose monetary policy to stimulate the economy and fuel inflation in a low-inflationary environment. This policy, based on Quantitative and Qualitative Easing (QQE), involves printing notes to buy assets like government or corporate bonds, providing liquidity. In 2016, the bank further loosened policy by introducing negative interest rates and directly controlling the yield of its 10-year government bonds.
The BoJ's massive stimulus led to the Yen's depreciation against major currencies, exacerbated by policy divergence with other central banks in 2022-2023. In 2024, the BoJ abandoned its ultra-loose policy stance, partly reversing the trend. A weaker Yen and rising global energy prices contributed to Japanese inflation exceeding the BoJ's target, with prospects of rising salaries further fueling inflation.
