Yen unexpectedly increases in value again

The Japanese Yen (JPY) strengthened against the US Dollar (USD) on Friday, sending USD/JPY lower. The JPY was supported by inflation data in Tokyo, which raised expectations that the Bank of Japan (BoJ) will raise interest rates in January.

Data showed that the headline CPI in Tokyo rose to 3.0% in December, up from 2.6% in November. The CPI excluding fresh food and energy also rose to 2.4%, up from 2.2% in the previous month. Although the CPI excluding fresh food was lower than expected (2.4% vs. 2.5% forecast), it still increased from the previous month.

The BoJ released comments from its December meeting saying it was ready to adjust monetary policy if the economy develops as expected. One board member stressed the need to monitor wage growth, while another urged caution before changing policy.

The US Dollar Index (DXY) is currently trading around 108.10, near its highest level since November 2022. However, the USD's upside momentum may be limited by falling US bond yields. The 2-year and 10-year yields are at 4.32% and 4.57%, respectively.

However, the USD/JPY decline may be contained as the USD continues to receive support from the Fed reducing the number of expected rate cuts. At its December meeting, the Fed cut interest rates by 0.25% and lowered its forecast for rate cuts in 2025 from four to two. Modest PCE inflation data has kept expectations of further cuts low.

Japanese Finance Minister Katsunobu Kato also spoke out about the strong fluctuations in foreign exchange rates, affirming that countermeasures will be taken if necessary.

Minutes of the BoJ's October meeting, released recently, showed that the bank is considering gradually raising interest rates if inflation continues to rise as expected, with a target of reaching 1% by the end of fiscal 2025. The BoJ also stressed the need to be cautious in adjusting policy, focusing on wage-led economic growth and using measures to fight deflation.

BOJ Governor Kazuo Ueda said the BoJ expects the Japanese economy to achieve its 2% inflation target on a sustainable basis next year. He also stressed that the timing and pace of monetary policy adjustments will depend on economic, price and financial conditions.

According to Lao Dong, updated at 4:00 p.m. on December 27, the USD/JPY exchange rate is currently fluctuating around 157.744 USD/JPY, meaning 1 USD can be exchanged for about 158 ​​JPY.