The Japanese Yen (JPY) continued to rise for a second consecutive day on January 16 after BoJ Governor Kazuo Ueda hinted that the bank could raise interest rates at its meeting next week. In addition, rising inflationary pressures in Japan increased the possibility that the BoJ would continue to tighten monetary policy, sending Japanese government bond (JGB) yields to multi-year highs, according to FXStreet.
In contrast, US government bond yields fell sharply on Wednesday after data showed that US inflation was cooling. This narrowed the yield gap between the US and Japan, causing the USD to lose its advantage over the JPY.
In addition, lower-than-expected inflation data in the US raised expectations that the Federal Reserve could cut interest rates twice this year. This weakened the US dollar, pushing the USD/JPY pair to a four-week low around 155.20 in early Asian trading on Thursday.
However, the upbeat market sentiment could limit demand for the safe-haven JPY and provide some support to the USD/JPY pair. Investors are now looking ahead to US economic data such as retail sales and weekly jobless claims for short-term trading opportunities.
Governor Kazuo Ueda said on Wednesday that the BoJ will consider raising interest rates at its policy meeting on January 23-24. Those comments, along with earlier remarks by Deputy Governor Ryozo Himino, raised expectations of a rate hike, helping the yen strengthen significantly.
Yields on 10-year Japanese government bonds also rose to their highest since 2011 on expectations the BoJ will continue to tighten policy.
Meanwhile, U.S. government bond yields fell on Wednesday after a U.S. inflation report showed that the CPI rose 0.4% in December from the previous month and 2.9% year-on-year, down from November's 3.3% increase (excluding food and energy prices).
The US dollar fell to a one-week low following the data, contributing to a sharp decline in USD/JPY.
Richmond Fed President Tom Barkin said new data showed inflation was moving closer to the 2% target, but interest rates still needed to be kept high to control it.
Moderate inflation data in the US also supported the market's optimism, reducing demand for safe-haven assets such as the Japanese yen. Investors are now waiting for more US economic data and the upcoming BoJ policy meeting for further guidance.
According to Lao Dong, updated at 11:00 a.m. on January 16, the USD/JPY exchange rate is currently fluctuating around 155.741 USD/JPY, meaning 1 USD can be exchanged for about 155 JPY.
