Japanese Yen Strengthens on Consumer Inflation Figures, USD/JPY Hangs Near Multi-Week Low
The Japanese Yen (JPY) strengthened during the Asian session on Tuesday following the release of slightly hotter-than-expected Japanese consumer inflation figures. This has revived bets for an imminent shift in the Bank of Japan’s (BoJ) policy stance. The Yen’s strength is also supported by a softer tone around the equity markets, as speculations arise that Japanese authorities will intervene to prevent further weakness in the domestic currency.
On the other hand, the US Dollar (USD) remains depressed for the second consecutive day due to a fresh decline in US Treasury bond yields. This has contributed to the pullback of the USD/JPY pair from a two-week high reached on Monday. However, a potential recession in Japan could force the BoJ to delay its plans to pivot away from ultra-loose policy settings and cap the Yen. This, along with hawkish Federal Reserve (Fed) expectations, should provide support to the USD and the currency pair.
Traders are cautious and refraining from placing aggressive bets on the USD/JPY pair. They are awaiting the release of key US macroeconomic data, including the Personal Consumption Expenditures (PCE) Price Index, which will provide cues about the Fed’s rate-cut path. In the meantime, traders will be monitoring US macro data such as Durable Goods Orders, the Conference Board’s Consumer Confidence Index, and the Richmond Manufacturing Index for short-term trading opportunities.
Japanese Consumer Inflation Figures
The slightly higher-than-expected rates of inflation in Japan have revived bets for an imminent shift in the Bank of Japan’s policy stance, offering support to the Japanese Yen. Japan’s Statistics Bureau reported that the headline Consumer Price Index (CPI) rose by 0.1% month-on-month (MoM) in January. However, it decelerated from a 2.6% year-on-year (YoY) rate to 2.2% during the reported month. The Core CPI, which excludes volatile fresh food items, climbed 2% YoY in January, surpassing estimates for a 1.8% annual gain. Additionally, the underlying CPI reading, which excludes both fresh food and energy, slowed from a 3.7% YoY rate in December to 3.5% in January, marking an 11-month low.
The slowdown in inflation comes on top of an unexpected recession in Japan during the fourth quarter, allowing the Bank of Japan to maintain its ultra-loose policy. The US Dollar, on the other hand, remains near its lowest level since February 2 due to a softer tone surrounding US Treasury bond yields, weighing on the USD/JPY pair. The markets have recently pushed back expectations for the first rate cut by the Federal Reserve to June from May, following sticky inflation and a resilient US economy.
Technical Analysis and Outlook
From a technical perspective, the near-term bias for the USD/JPY pair still seems tilted in favor of bullish traders. However, it would be prudent to wait for follow-through buying beyond the multi-month peak around the 150.85-150.90 region before positioning for further gains. The pair might then climb to the 151.45 hurdle, with momentum potentially extending towards the 152.00 neighborhood, which represents a multi-decade peak set in October 2022 and retested in November 2023.
On the flip side, any meaningful pullback is likely to find decent support near the psychological level of 150.00. This is followed by last week’s swing low around the 149.70-149.65 region. If this support is broken, it could drag the USD/JPY pair further towards the 149.35-149.30 horizontal support. The downward trajectory could extend further towards the 149.00 mark en route to the strong horizontal resistance breakpoint at 148.80-148.70. Breaking this level decisively would negate the near-term positive outlook and pave the way for a further depreciating move.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies and its value is influenced by various factors. These include the performance of the Japanese economy, the policy decisions of the Bank of Japan (BoJ), the differential between Japanese and US bond yields, and risk sentiment among traders.
The BoJ plays a crucial role in determining the value of the Yen through its currency control measures. While it has intervened in currency markets in the past to lower the value of the Yen, it does so sparingly due to political concerns from its main trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against other major currencies. This depreciation has been further exacerbated by a widening policy divergence between the BoJ and