The Japanese Yen (JPY) is fluctuating in a narrow range against the US Dollar (USD), remaining near its lowest level in many months recorded last week.
The market is currently skeptical about the Bank of Japan's (BoJ) interest rate hike plan, while the US Federal Reserve's (Fed) policy tightening continues to strengthen the interest rate differential between the US and Japan, putting pressure on the Yen.
Positive sentiment in global financial markets has also reduced demand for the Yen, which is considered a safe-haven asset. However, recent strong inflation data from Japan still leaves open the possibility of the BoJ raising interest rates in January or March 2024. At the same time, geopolitical risks, trade war concerns and the possibility of Japan intervening in the foreign exchange market to support the domestic currency have made investors more cautious when betting heavily on the weakness of the JPY.
BoJ cautious in monetary policy
Minutes from the BoJ's October meeting, released on December 24, emphasized that the bank could gradually raise interest rates if inflation develops as expected, with a target of reaching 1% by the end of fiscal 2025. However, the BoJ also reaffirmed its monetary policy caution, prioritizing wage-led economic growth amid many domestic and foreign uncertainties, and maintaining fiscal measures to counter deflationary pressures.
BoJ Governor Kazuo Ueda recently said that the bank will continue to monitor data on salary increases next year before making a major decision. This reinforces the view that the BoJ will not raise interest rates at its January monetary policy meeting but may postpone it until March, further weakening the Yen's position in the short term.
Warning from the Japanese Ministry of Finance
Japanese Finance Minister Katsunobu Kato reiterated on December 24 concerns about strong fluctuations in the foreign exchange market, especially the excessive depreciation of the Yen. He stressed that the government is ready to intervene if necessary to stabilize the domestic currency. "We will take appropriate action to deal with excessive fluctuations," Kato said at a regular press conference. Last week, he also described the current foreign exchange market situation as "alarming".
The Yen is currently trading near its lowest level in the past 5 months, surpassing 157 Yen to 1 USD, after depreciating 4.7% this month. This decline is attracting the attention of traders, worried about the possibility of Japan intervening in the market to support the domestic currency.
USD and US financial market outlook
Meanwhile, the US Dollar has remained near its peak for the past two years, thanks to the yield on the 10-year US government bond increasing to its highest level since May. Although the US Consumer Confidence Index released by the Conference Board fell to 104.7 from 111.7 previously, the market still maintains a positive outlook for the Fed's tightening policy in 2025.
Investors are now waiting for data from the US Richmond manufacturing index for further trading momentum, although trading volumes are expected to remain low during the Christmas holiday.
Update the latest Yen exchange rate HERE.
