Japanese Yen drops to three-week low, around 154.00 against USD

The Japanese Yen drifts lower against its American counterpart for the sixth straight day.
Expectations that the BoJ will keep rates steady this week continue to weigh on the JPY.
Elevated US bond yields contribute to driving flows away from the lower-yielding JPY.

The Japanese Yen (JPY) struggles to capitalize on a modest Asian session uptick on Monday and touches a three-week low against its American counterpart in the last hour. The initial reaction to the better-than-expected release of Core Machinery Orders and flash Manufacturing PMI from Japan turned out to be short-lived amid firming expectations that the Bank of Japan (BoJ) will not raise interest rates later this week. Furthermore, bets for a less dovish Federal Reserve (Fed) remain supportive of elevated US Treasury bond yields and turn out to be another factor undermining the lower-yielding JPY.

That said, persistent geopolitical risks stemming from the protracted Russia-Ukraine war and the ongoing conflicts in the Middle East, along with concerns about US President-elect Donald Trump's tariff plans, could limit losses for the safe-haven JPY. Traders might also refrain from placing aggressive directional bets and keenly await this week's key central bank event risks. The Fed is scheduled to announce its decision at the end of a two-day meeting on Wednesday, which will be followed by the crucial BoJ meeting on Thursday and help in determining the next leg of a directional move for the JPY.

Japanese Yen bears retain control amid bets that the BoJ will maintain the status quo

Government data released earlier this Monday showed that Japan's core machinery orders rose 2.1% in October and registered a strong growth of 5.6% on a year-on-year basis.
The au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) improved to 49.5 in December, though remained in contraction territory for the seventh straight month.
Meanwhile, the gauge for the services sector rose to 51.4 in December from 50.5, while the composite PMI stood at 50.8 during the reported month, up from 50.1 in November.
This comes after the Bank of Japan's Tankan survey showed on Friday that business confidence at Japan's large manufacturers improved during the three months to December.
Moreover, expectations that consumer prices in Japan will remain above the BoJ's 2% target, a moderately expanding economy and a rise in wages give the BoJ reason to hike rates.
Investors, however, remain sceptical regarding the BoJ's intention to tighten its monetary policy further, which continues to exert downward pressure on the Japanese Yen on Monday.
The yield on the benchmark 10-year US government bond rose to a three-week high on Friday amid rising bets that the Federal Reserve will adopt a cautious stance on cutting rates.
According to the CME Group's FedWatch Tool, traders are pricing in over a 93% chance that the US central bank will lower borrowing costs again, by 25 basis points on Wednesday.
However, signs that the progress in lowering inflation toward the US central bank's 2% target has stalled raised the possibility of a slower pace of interest rate reductions next year.
Monday's US economic docket features the release of the flash Manufacturing and Services PMIs, along with the Empire State Manufacturing Index, later during the US session.
That said, the market focus remains glued to the crucial FOMC and the BoJ meetings this week, which will help in determining the near-term trajectory for the USD/JPY pair.

USD/JPY seems poised to appreciate further and aim to reclaim the 155.00 psychological mark

From a technical perspective, a sustained move and acceptance above the 61.8% Fibonacci retracement level of the November-December fall from a multi-month peak could be seen as a fresh trigger for bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and suggest that the path of least resistance for the USD/JPY pair remains to the upside. Hence, some follow-through strength towards the next relevant hurdle, around the 154.55 region, en route to the 155.00 psychological mark, looks like a distinct possibility.

On the flip side, the Asian session low, around the 153.35-153.30 area, now seems to act as an immediate strong support ahead of the 153.00 mark. A convincing break below the latter might expose the very important 200-day Simple Moving Average (SMA) pivotal support near the 152.10-152.00 region. A convincing break below the latter might shift the bias in favor of bearish traders and drag the USD/JPY pair towards the 151.00 round figure en route to the 150.00 psychological 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.