The Japanese Yen (JPY) is trading in a narrow range against the US Dollar (USD), holding near multi-month lows hit 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 moves continue to strengthen the interest rate differential between the US and Japan, putting pressure on the Yen.
Positive sentiment in global financial markets has also dampened demand for the yen, which is considered a safe haven. 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 its currency have made investors more cautious about betting heavily on the JPY's weakness.
BoJ cautious in monetary policy
The minutes of the BoJ’s October meeting, released on December 24, stressed that the bank could raise interest rates gradually if inflation moves in line with expectations, with a target of 1% by the end of fiscal 2025. However, the BoJ also reaffirmed its cautious stance on monetary policy, prioritizing wage-led economic growth amid uncertainties at home and abroad, while maintaining fiscal measures to counter deflationary pressures.
BoJ Governor Kazuo Ueda recently said that the bank will continue to monitor wage growth data next year before making any major decisions. 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 Japan's Ministry of Finance
Japanese Finance Minister Katsunobu Kato on December 24 reiterated his concern about the sharp 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 trading near a five-month low of 157 yen per dollar, after losing 4.7 percent this month. The decline is drawing attention from traders concerned about the possibility of Japan intervening in the market to support its currency.
Outlook for the US Dollar and US Financial Markets
Meanwhile, the US dollar remained near a two-year high, helped by the 10-year US Treasury yield rising 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 remained positive on the prospect of a Fed tightening policy in 2025.
Investors are now waiting for data from the US Richmond manufacturing index for further trading impetus, although trading volumes are expected to remain low during the Christmas holiday.
Update the latest Yen exchange rate HERE.
