The Japanese Yen continues to strengthen against the USD and may increase further.
According to FXStreet, on February 5, the Japanese Yen (JPY) is holding on to its significant gains during the day, although it has slightly decreased but reached its highest level since mid-December last year. The main reason is that newly released data shows that real wages in Japan are increasing, raising expectations that the Bank of Japan (BoJ) will continue to raise interest rates.
This is in stark contrast to the expectation that the US Federal Reserve will cut interest rates twice this year. This difference in monetary policy has helped the Japanese Yen strengthen against the USD.
However, the market is still concerned that Japan could become a tariff target of US President Donald Trump.
The bullish sentiment in the market has also made investors less interested in safe-haven assets such as the JPY. However, with a solid foundation and a weakening USD, the Japanese Yen still has the opportunity to continue to appreciate.
Why has the Japanese Yen increased the most since the beginning of the year?
New data showed that Japan's real wages rose 0.6 percent in December from a year earlier. The previous month's figure was also revised up from a 0.3 percent decline to a 0.5 percent rise.
In addition, inflation in Japan rose to 4.2% in December - the highest level since early 2023. This increases the possibility that the BoJ will continue to raise interest rates, thereby making the Japanese Yen more attractive.
Kazuhiro Masaki, a senior BOJ official, said the central bank sees inflation moving toward its 2% target, while service prices continue to rise. He also noted that post-pandemic prices are largely driven by rising input costs.
In addition, business activity in Japan's service sector grew for the third consecutive month, with the PMI rising from 50.9 to 53.0 - the highest level since September 2024.
Meanwhile, the US labor market showed signs of weakness as the latest report showed that the number of job vacancies in December fell to 7.6 million, lower than forecast. This could force the Fed to continue cutting interest rates, contrary to the BoJ's policy, causing the USD to weaken against the JPY.
Fed Vice Chairman Philip Jefferson said there was no need to rush to cut interest rates because the US economy remained strong. However, he also acknowledged that interest rates could fall in the medium term and the Fed was facing many uncertainties from government policy.
In another development, President Trump delayed the imposition of 25% tariffs on Canada and Mexico for another 30 days. This, along with expectations of progress in US-China trade negotiations, helped to boost market sentiment.
Still, investors are concerned that Japan could be Trump’s next target for tariffs. Japanese Prime Minister Shigeru Ishiba is scheduled to meet Trump later this week, and the meeting could shed more light on the risk, especially given Japan’s large trade surplus with the United States.
Investors are now awaiting key economic data from the US, including the private sector employment report and the services PMI, which will impact the USD ahead of the Non-Farm Payrolls report on Friday.
According to Lao Dong's records at 12:00 on February 5, 2025, the Yen decreased to 153.522 USD/JPY, meaning 1 USD can be exchanged for about 155 JPY.
