Japanese Yen gains ground as BoJ rate hike bets rise
- USD/JPY declines to near 159.45 in Wednesday’s Asian session.
- Expectations that the BoJ could hike interest rates as early as September support the Japanese Yen.
- Traders scale back bets of an interest rate hike by the Fed.
The USD/JPY pair edges lower to around 159.45 during the Asian trading hours on Wednesday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) as market expectations grow for another interest rate hike by the Bank of Japan (BoJ). Traders will keep an eye on Japan’s National Consumer Price Index (CPI) inflation report, which will be released later on Friday.
Markets are currently pricing in a high chance of another BoJ rate hike, potentially as soon as the upcoming policy meeting. This expectation stems from recent comments by BoJ policymakers and inflation data that remains above the central bank’s 2% target. Overnight index swaps are pricing in an about 80% probability of a rate hike as soon as September, according to Reuters.
However, mounting fiscal concerns in Japan could weigh on the JPY and act as a tailwind for the pair. Prime Minister Sanae Takaichi’s plan to cut the consumption tax on food to 1% for two years has raised market concerns, as the government has yet to identify an alternative revenue source and the measure is viewed as an ineffective way to combat inflation.
Traders reduce their bets of the US Federal Reserve (Fed) rate hike in the September policy meeting after the release of unexpected job losses in July and tame inflation data.
"Benign inflation and signs of softness in the US labour market make a September Fed hike highly unlikely at this point—despite the modest firming in Fed expectations this morning," said Scotiabank analysts led by Shaun Osborne. "Short-term USD gains remain a fade from our point of view,” Osborne added.
BoJ rate dilemma deepens as insurers’ risks come into focus
Rabobank underscores the policy bind facing the BoJ, asking whether “if the BoJ were to raises rates to support JPY, could its life insurers suffer even more?” The bank highlights that any move to shore up the Yen by tightening policy risks exacerbating pressures on Japan’s life insurance sector, sharpening the trade-off between currency support and financial stability.
Technical Analysis: USD/JPY remains capped under the 100-day SMA
In the daily chart, USD/JPY holds a bearish near-term bias as spot remains capped beneath the 100-day Simple Moving Average (SMA) and the Bollinger Bands’ 20-day middle band. The pair is consolidating below these clustered dynamic barriers, while the Relative Strength Index (RSI) at 44.46 sits in neutral territory, hinting at fading upside momentum rather than oversold conditions.
On the topside, the key resistance is aligned at the Bollinger middle band and the 100-day SMA at 160.00. The next hurdle is seen at the Bollinger upper band near 164.60. On the downside, the Bollinger lower band around 155.40 stands out as the next meaningful support, and a break toward that area would reinforce the current corrective tone.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Japanese Yen FAQs
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.
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.
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.
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.
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