Yen appreciates, booming at the beginning of the new year

According to FXStreet, on January 2, the USD/JPY pair continued to decline for three consecutive sessions, trading around 156.20 USD/JPY. This decline reflects the strengthening of the Japanese Yen (JPY), as the market predicts that the Bank of Japan (BoJ) will raise interest rates in January.

The main driver of the yen’s rise was strong inflation data from Tokyo. The consumer price index (CPI) rose to 3.0% year-on-year in December, up from 2.6% in November. Other CPI readings also showed an upward trend, providing the basis for the BoJ to end its easy monetary policy and shift to tightening, which typically boosts the value of the local currency.

Meanwhile, the dollar weakened as U.S. Treasury yields fell, making the greenback less attractive relative to the yen. The two-year and 10-year U.S. Treasury yields fell to 4.24% and 4.53%, respectively. The U.S. dollar index (DXY), which measures the greenback against six major currencies, also edged lower to around 108.00.

Market sentiment is currently favoring the yen as a safe haven amid global monetary policy uncertainty. The yen is traditionally considered a safe haven, and expectations of a BoJ rate hike have given investors even more reason to shift to holding the yen.

The yen's rise has also been supported by the narrowing yield differential between Japanese and US bonds. For years, higher US yields relative to Japan's have weakened the yen. But now, with the BoJ expected to raise interest rates and other central banks like the Fed likely to maintain a cautious stance, the gap is narrowing, creating room for the yen to appreciate.

Overall, the recovery of the JPY has put strong downward pressure on USD/JPY. If the BoJ does raise interest rates in the near future, the Yen could continue to appreciate, keeping USD/JPY down in the medium to long term.

According to Lao Dong, updated at 3:00 p.m. on January 2, the USD/JPY exchange rate is currently fluctuating around 156.526 USD/JPY, meaning 1 USD can be exchanged for about 156.5 JPY.