Japanese Yen seems poised to appreciate further vs USD amid divergent BoJ-Fed expectations

FXStreetDec 4, 2025 2:53 AM

The Japanese Yen remains well supported by rising bets for a December BoJ rate hike.
Dovish Fed expectations weigh on the USD and act as a headwind for the USD/JPY pair.
The setup suggests that the path of least resistance for spot prices is to the downside.

The Japanese Yen (JPY) is trading with a positive bias during the Asian session on Thursday and looking to build on the previous day's gains against a broadly weaker US Dollar (USD). Traders ramped up their bets for an imminent interest rate hike by the Bank of Japan (BoJ) following Governor Kazuo Ueda's remarks earlier this week. Moreover, a survey showed on Wednesday a modest expansion of private sector output in Japan for the eighth straight month in November and backs the case for further BoJ policy normalization. This, in turn, might continue to underpin the JPY.

Meanwhile, prospects for BoJ tightening, along with a reflationary push by new Prime Minister Sanae Takaichi, keep super-long-dated Japanese government bonds (JGB) under pressure. The resultant narrowing of the rate differential between Japan and other major economies could further benefit the lower-yielding JPY. The USD, on the other hand, languishes near its lowest level since late October amid rising bets for another interest rate cut by the Federal Reserve (Fed) next week. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside.

Japanese Yen bulls have the upper hand amid firming BoJ rate hike expectations

Bank of Japan Governor Kazuo Ueda gave the clearest hint so far of an impending rate hike and said on Monday that the central bank would consider the pros and cons of raising its policy rate at its December 18-19 meeting. Ueda added that real interest rates were deeply negative, and another hike would still leave borrowing costs low.
Japan’s S&P Global Composite PMI was finalized at 52.0 for November, marking the strongest reading since August. It also signaled an eighth consecutive month of private-sector expansion amid a quicker rise in services and a slower contraction in manufacturing. Moreover, business confidence strengthened to its highest level since January.
This, in turn, reaffirmed bets that the BoJ will raise its rate by a quarter percentage point, to 0.75% this month. Moreover, Prime Minister Sanae Takaichi's massive spending plan, to be funded by new debt issuance, pushed the yield on 30-year Japanese government bonds to a record high on Thursday and should benefit the Japanese Yen.
The US Dollar, on the other hand, dropped to its lowest level since late October on Wednesday amid the growing acceptance that the Federal Reserve (Fed) will lower borrowing costs at the end of next week's policy meeting. The expectations were reaffirmed by weaker-than-expected US private-sector employment details released on Wednesday.
The Automatic Data Processing (ADP) reported that private-sector employers shed 32,000 jobs in November, compared to the 47,000 increase (revised from 42,000) in the previous month. This figure came in below expectations for an addition of 5,000 and also marked the largest monthly decline since early 2023, pointing to a weakening US labor market.
Traders now look forward to Thursday's US economic docket, featuring Challenger Job Cuts and the usual Weekly Initial Jobless Claims. The focus, however, will remain glued to the US Personal Consumption Expenditure (PCE) Price Index on Friday, which will drive the near-term USD demand and provide a fresh impetus to the USD/JPY pair.

USD/JPY seems vulnerable while below the 100-hour SMA pivotal resistance

The overnight slide followed Tuesday's failure to find acceptance above the 100-hour Simple Moving Average (SMA) and the 156.00 round figure, which, in turn, favors the USD/JPY bears. However, slightly positive oscillators on the daily chart suggest that any further decline could find decent support near the 155.00 psychological mark. A convincing break below the latter will reaffirm the negative outlook and set the stage for an extension of the recent pullback from the 158.00 neighborhood, or the highest level since January touched last month.

On the flip side, the 100-hour SMA, currently pegged near the 155.70 region, could act as an immediate hurdle and cap any attempted recovery move. This is closely followed by the 156.00 mark, above which a fresh bout of short-covering could lift the USD/JPY pair to the next relevant hurdle near the 156.60-156.65 region en route to the 157.00 round figure. The momentum could extend further towards mid-157.00s before spot prices make a fresh attempt to conquer the 158.00 mark.

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.

Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.