Yen about to fall into a downward spiral

Weak Japanese Yen

The Japanese Yen (JPY) is hovering around a multi-month low against the US Dollar (USD) on December 26, showing no signs of recovery. Investors are skeptical about whether the Bank of Japan (BoJ) will actually continue to raise interest rates as expected. Meanwhile, the US Federal Reserve (Fed) is still maintaining its stance of tightening monetary policy, causing the interest rate gap between the US and Japan to widen. This makes the Yen, with its low yield, less attractive.

In addition, the optimistic sentiment in the market, as investors turn to risky assets, also reduces the demand for the Yen, which is considered a safe haven. However, recent high inflation data from Japan still leaves open the possibility that the BoJ may raise interest rates in January or March. At the same time, risks such as geopolitical conflicts, trade wars, or the possibility of the Japanese government intervening in the market to support the Yen are keeping investors from selling this domestic currency.

Fears of intervention from the Japanese government

According to the minutes of the BoJ's October meeting released, the central bank is likely to raise interest rates gradually, depending on inflation developments. The target may be to reach 1% by the end of fiscal 2025.

However, the BoJ has remained cautious with its monetary policy, stressing the need to focus on wage-led economic growth, while facing many domestic and international uncertainties. BoJ Governor Kazuo Ueda also said they would wait for more data to see whether current wage growth will be maintained next year, before deciding on action.

Currently, the market believes that the BoJ will not raise interest rates at the January meeting but will wait until March. This continues to put pressure on the Yen.

Japan's Finance Minister Katsunobu Kato has warned of major volatility in the foreign exchange market and said the government would act if necessary to prevent the yen from falling too much.

Meanwhile, in the US, the yield on the 10-year government bond has just reached its highest level since May, thanks to the Fed maintaining its policy tightening stance for 2025. The US dollar remains near a two-year high despite the recently released consumer confidence data falling from 111.7 to 104.7.

Investors are waiting for the Richmond regional manufacturing index from the US for further signals, but low trading volumes on Christmas Day kept the market volatile.

According to Lao Dong, updated at 4:00 p.m. on December 26, the USD/JPY exchange rate is currently fluctuating around 157.321 USD/JPY, meaning 1 USD can be exchanged for about 157 JPY.