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Japanese Yen strengthens as market weighs potential for policy divergence



  • Japanese Yen continues its recovery into the weekend on potential for divergent monetary policy.
  • BoJ has started normalizing policy as other central banks are close to reaching the end of their tightening cycles.
  • USD/JPY declines sharply after Nonfarm Payrolls miss brings into doubt further Fed rate hikes. 

The Japanese Yen (JPY) trades higher in most pairs at the end of the week after recovering from oversold conditions following the dramatic post-Bank of Japan (BoJ) meeting sell-off on Tuesday. 

The Yen may be benefiting from the market view that the BoJ will eventually normalize its ultra-loose monetary policy stance at a time when most other central banks are expected to be ending their tightening cycles. 

Permanently negative interest rates in Japan have kept the Yen weak vis-a-vis other currencies, whose central banks have been raising interest rates to combat inflation. Investors tend to park their capital where it can manifest the highest risk-free returns, putting the Yen at a severe disadvantage. With most major central banks now having reached peak interest rates, however, the tables could turn if the BoJ starts tightening.

At the last BoJ meeting, the board of governors made a first step towards tightening or normalizing policy, when it relaxed its cap on 10-year Japanese Government Bond (JGB) yields, essentially a form of quantitative easing. 

The reason the Yen still sold-off after the meeting, however, was because Bank of Japan Governor Kazuo Ueda remarked that most inflation was still coming from higher commodity prices rather than increased demand, suggesting the BoJ would need to keep interest rates lower for longer.

Daily digest market movers: Yen recovers on divergent monetary policy outlook

  • The Yen continues to recover against most majors into the weekend as market perceptions see the potential for policy divergence between BoJ and other major central banks.
  • The BoJ could start raising rates at a time when the other central banks are reaching their peak interest rates or lowering them, which would provide the perfect monetary policy differential for a period of dramatic strengthening for the Japanese currency.
  • On Friday, the Yen gains the most against the US Dollar (USD), after the release of the October Nonfarm Payrolls report leads traders to offload the Dollar.  
  • The report shows a weakening of most labor metrics in October, further adding weight to the view that the Federal Reserve (Fed) is now done with raising interest rates. 
  • Payrolls themselves rose by only 150K versus the 180K forecast, and way below the 297K (itself revised down from 336K) of the previous month. 
  • Average Earnings rose by only 0.2% MoM versus the 0.3% expected, Average Weekly Hours worked fell to 34.3 from 34.4, and the Unemployment Rate rose to 3.9% from 3.8% expected and the same previously.
  • The Yen is hampered by a lack of demand-driven inflation. BoJ Governor Ueda said inflation is mainly due to rising input costs due to higher commodity prices, especially Oil, rather than being “demand driven”.  
  • His comments suggest the BoJ will need to continue to maintain easy monetary policy for longer than had been hoped to inject growth into the economy, rather than to start to hike rates.
  • The Yen is further hampered by a disconnect between the actions of the BoJ and its rhetoric. Despite changing the 1.0% JGB yield cap to a reference point for intervention rather than a hard ceiling, the BoJ still intervened midweek to cap rising yields as they inched closer to the 1.0% mark, basically continuing to treat the level as a ceiling, according to a report by Reuters.    

Japanese Yen technical analysis: USD/JPY short-term uptrend at risk of reversing

USD/JPY – the amount of Yen that one Dollar buys – sank after the release of lackluster Nonfarm Payrolls led to mass ditching of the Dollar. 

From a short-term perspective the decline brings the pair perilously close to a trend reversal. A break below the 148.80 low of October 30 would provide much stronger evidence of bears finally turning the tables on bulls, as it is the last major lower high of the short-term uptrend.

US Dollar vs Japanese Yen: 4-hour Chart

There are further signs of weakness: the pair has cleanly broken out the rising channel it has been in – disrespecting for the second time this week, the lower boundary line.   

It has cut straight through the 50 and 100-four hour Simple Moving Averages (SMA) and is challenging the 200. 

US Dollar vs Japanese Yen: Daily Chart

On the daily chart, which measures the medium-term trend, the uptrend still looks solid, except for the channel breakout. The 148.80 lows is still the level to watch and if it is not broken bulls will continue to hold out hope of a recovery. Apart from that, the next major support level is the 50-day SMA at 148.63. 

The Moving Average Convergence Divergence (MACD) indicator has been showing bearish divergence for some time, as it has been falling whilst price was rising during the last days of October. Nevertheless, this is not sufficient on its own to suggest the medium-term uptrend has reversed.

Ultimately the “trend is your friend..” as the saying goes, and for USD/JPY the short, medium and long-term trends are all still bullish, suggesting the odds continue to favor more upside eventually. 

If the 151.93 32-year-high of 2022 is breached, the uptrend will be reconfirmed, with next targets expected to be met at the round number marks – 153.00, 154.00, 155.00 etc.


Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.

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