USD/JPY continues to fall toward 156.00 as traders expect BoJ to raise rates in January

USD/JPY depreciates as traders assess the market sentiment of the BoJ raising interest rates in January.
The Japanese Yen is set to decline more than 10% against the US Dollar in 2024.
US Treasury yields fell by approximately 2% with 2-year and 10-year yields at 4.24% and 4.53%, respectively, on Monday.

USD/JPY extends its losses for the third consecutive session on New Year’s Eve, trading around 156.20 during early European hours on Tuesday. However, the Japanese Yen (JPY) is headed for a decline of over 10% in 2024, marking its fourth straight year of weakening against the US Dollar (USD).

The USD/JPY pair’s downside is attributed to the improved Japanese Yen (JPY) as traders continue to assess the market sentiment that the Bank of Japan (BoJ) may raise interest rates in January following the release of the Tokyo Consumer Price Index (CPI) inflation data last week.

In December, the headline Tokyo CPI inflation rose to 3.0% YoY, up from 2.6% in November. Meanwhile, the Tokyo CPI excluding Fresh Food and Energy increased to 2.4% YoY, compared to 2.2% the previous month. The Tokyo CPI excluding Fresh Food also climbed 2.4% YoY, slightly below the expected 2.5% but higher than the 2.2% recorded in November.

Additionally, the USD/JPY pair faces challenges as the US Dollar loses ground amid weaker Treasury yields. The US Dollar Index (DXY), which tracks the USD against six major currencies, remains soft around 108.00 as US Treasury bond yields fell by approximately 2% on Monday. The 2-year and the 10-year yields stood at 4.24% and 4.53%, respectively.

The downside risks for the US Dollar seem restrained as the Federal Reserve (Fed) may adopt a more cautious tone regarding potential rate cuts in 2025, signaling a shift in its monetary policy approach. This adjustment comes amidst uncertainties tied to the economic strategies expected under the incoming Trump administration.

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.