The USD/JPY pair has been on a downward trend for the third consecutive session on New Year’s Eve, trading around 156.20 during early European hours on Tuesday. The Japanese Yen is expected to weaken by over 10% against the US Dollar in 2024, marking its fourth consecutive year of depreciation. The decline in the USD/JPY pair is primarily influenced by the improved sentiment around the Japanese Yen as traders assess the possibility of the Bank of Japan (BoJ) raising interest rates in January following the release of the Tokyo Consumer Price Index (CPI) data last week.
The recent data showed that the headline Tokyo CPI inflation rose to 3.0% year on year in December, up from 2.6% in November. Meanwhile, the Tokyo CPI excluding Fresh Food and Energy also saw an increase to 2.4% year on year, compared to 2.2% the previous month. The USD/JPY pair faces additional challenges as the US Dollar weakens due to falling Treasury yields. The US Dollar Index (DXY) remains soft around 108.00 as US Treasury bond yields decreased by approximately 2% on Monday, with the 2-year and 10-year yields standing at 4.24% and 4.53%, respectively.
Despite the downside risks for the US Dollar, the Federal Reserve (Fed) may adopt a more cautious approach regarding potential rate cuts in 2025, signaling a shift in monetary policy. This adjustment comes amidst uncertainties surrounding the economic strategies expected under the incoming Trump administration. The Japanese Yen (JPY) is a highly traded currency that is influenced by various factors such as the Bank of Japan’s policies, the differential between Japanese and US bond yields, and risk sentiment among traders.
The Bank of Japan plays a significant role in determining the value of the Japanese Yen through its currency control measures. The BoJ has intervened in currency markets in the past, primarily to lower the value of the Yen, although it does so cautiously due to political concerns from trading partners. The ultra-loose monetary policy adopted by the BoJ between 2013 and 2024 led to a depreciation of the Yen against other major currencies due to increasing policy divergence. However, the gradual unwinding of this policy has provided some support to the Yen.
The BoJ’s decision to gradually abandon the ultra-loose policy in 2024, combined with interest rate cuts by other central banks, is narrowing the differential between US and Japanese bond yields. The Japanese Yen is often considered a safe-haven currency, meaning that investors tend to flock to it during times of market turmoil due to its perceived stability. This flight to safety typically strengthens the Yen against riskier currencies. Overall, the Japanese Yen’s performance is closely tied to the policies of the Bank of Japan and global market sentiments.
