Japanese Yen Extends Intraday Decline but Bullish Potential Remains Strong.
Japanese Yen (JPY) continued its steady intraday descent against the US Dollar (USD) during the Asian session on Friday. This move pushed the USDJPY pair closer to the mid-148.00s, as global risk sentiment improved slightly. While the short-term trajectory favors further JPY weakness, the overall bullish outlook for the currency remains intact due to hawkish expectations from the Bank of Japan (BoJ) and persistent inflationary pressures in Japan.
At the same time, the US Dollar struggles to maintain significant gains, as increasing speculation about multiple interest rate cuts by the Federal Reserve (Fed) weighs on the greenback. With these contrasting forces at play, traders remain cautious about making aggressive bets on the USDJPY pair.
Global Risk Sentiment Improves, Weighing on the Yen
The Japanese Yen, often seen as a safe-haven currency, tends to strengthen during times of global uncertainty. However, recent developments have provided a modest lift to risk sentiment, leading to a decline in the Yen’s value.
US political stability improves: Reports suggest that there will be enough Democratic votes to prevent a US government shutdown, reducing economic uncertainty.
Trade tensions ease: Comments from Ontario Premier Doug Ford and other Canadian officials indicated that talks with US Commerce Secretary Howard Lutnick were constructive, potentially lowering the temperature on ongoing trade disputes.
Russian President Vladimir Putin has conditionally supported a 30-day ceasefire proposal from the US and Ukraine, which has further bolstered global market confidence.
With fewer risk factors driving demand for the Yen, investors have been unwinding some of their safe-haven positions, pushing the currency lower against the USD.
BoJ Rate Hike Uncertainty Adds Pressure on Japanese yen
While market participants generally believe that the BoJ will hike rates again in response to inflationary pressures, recent reports suggest that the timing of such a move may be uncertain.
A source familiar with the BoJ’s thinking mentioned that “Japan’s economy and price developments appear on track, but overseas risks have risen.”
Two additional sources echoed concerns that the heightened global uncertainty could delay the BoJ’s next rate hike.
Despite this uncertainty, Japan’s domestic inflationary pressures continue to build, making it difficult for the BoJ to delay tightening monetary policy indefinitely.
Wage Growth and Inflation Support a Hawkish BoJ Stance
One of the key factors influencing the BoJ’s policy decisions is wage growth in Japan. The ongoing Shunto wage negotiations, a major annual event, will provide further insight into Japan’s economic trajectory.
Prime Minister Shigeru Ishiba emphasized the importance of strong wage growth, urging companies and trade unions to boost salaries.
A major Japanese labor union group announced that its members had secured average wage hikes exceeding 5%, slightly lower than last year but still substantial.
The final results of the Shunto negotiations are expected on Friday, and strong wage growth could strengthen the BoJ’s resolve to continue normalizing monetary policy.
Additionally, Japan’s 10-year government bond yield remains close to its highest level since October 2008, reinforcing expectations that interest rates will rise further.
US Dollar Gains Are Limited by Fed Rate Cut Bets
While the USD has gained modestly against the JPY, it struggles to attract strong bullish momentum due to the rising likelihood of multiple Fed rate cuts in 2024.
Market expectations currently price in three rate cuts of 25 basis points each, at the Fed’s June, July, and October meetings.
These expectations have been reinforced by recent economic data, which suggest that US inflation is cooling:
The Producer Price Index (PPI) was unchanged in February, with the annual rate slowing to 3.2% from 3.7% in January.
The Consumer Price Index (CPI) also came in softer than expected earlier in the week, signaling that inflationary pressures are easing.
If inflation continues to decline, the Fed will have more room to cut rates, which could limit the USD’s upside potential and prevent the USDJPY pair from rallying significantly.
Japanese yen Outlook: Short-Term Weakness, Long-Term Strength
While the Japanese Yen is experiencing near-term weakness, the broader outlook remains bullish for several reasons:
1. Hawkish BoJ Expectations – Despite some uncertainty about the timing, the BoJ is widely expected to raise interest rates in 2024, supporting the Yen.
2. Japan’s Inflation and Wage Growth – Continued wage hikes and strong inflationary pressures give the BoJ room to tighten monetary policy further.
3. US Dollar Vulnerability – As Fed rate cut bets increase, the USD could face long-term depreciation, which would favor a stronger JPY.
4. Narrowing Interest Rate Differential – The gap between Japanese and US interest rates is shrinking, reducing the incentive for carry trades that have previously weakened the Yen.
In the short term, however, risk sentiment and Fed-BoJ policy uncertainty could keep the USDJPY pair supported around current levels.
Key Market Events to Watch
As traders look for direction, several upcoming events could influence the USD/JPY pair:
Japan’s Shunto Wage Negotiation Results (Friday) – If wage hikes remain strong, it could strengthen the case for further BoJ tightening, boosting JPY.
US Michigan Consumer Sentiment Index (Friday) – A weaker-than-expected reading could add pressure on the USD, reinforcing rate cut expectations.
Federal Reserve Meeting (Upcoming) – Any signals of a softer Fed stance could push USD lower, favoring JPY.
BoJ Policy Announcements – Any hints about the timing of future rate hikes will be closely watch by Yen traders.
Conclusion
The Japanese Yen is currently under pressure, as improving risk sentiment and uncertainty over BoJ rate hikes weigh on the currency. However, the broader outlook remains favorable for JPY, supported by rising inflation, strong wage growth, and hawkish BoJ expectations.
Meanwhile, the US Dollar struggles to maintain its strength, with Fed rate cut bets increasing amid signs of easing inflation. This suggests that while USD/JPY may stay range-bound in the short term, a JPY rebound is likely in the coming months.
Traders should watch key economic data releases and central bank signals for further clarity on the USDJPY trajectory. Will the BoJ move forward with another rate hike soon, or will global uncertainty delay their plans? The market’s reaction to these factors will shape JPY’s direction in the weeks ahead.
