Japanese Yen bears have the upper hand ahead of key central bank event risks

The Japanese Yen attracts some sellers following the release of Japanese Trade Balance data.
Bets that the BoJ will keep rates unchanged and elevated US bond yields also weigh on the JPY.
Traders keenly await the crucial FOMC decision, ahead of the BoJ policy update on Thursday.

The Japanese Yen (JPY) struggles to capitalize on the previous day's modest recovery gains against its American counterpart and attracts fresh sellers during the Asian session on Wednesday. Data released earlier today showed that Japan’s Trade Balance unexpectedly improved in November on the back of strong growth in exports, though a fall in imports pointed to a weak local demand. This, along with the uncertain economic outlook amid concerns about US President-elect Donald Trump's tariff plans, reaffirms expectations that the Bank of Japan (BoJ) will keep interest rates steady later this week and undermines the JPY.

Meanwhile, the prospects for a less dovish Federal Reserve (Fed), along with expectations that Trump's policies may lead to an increase in government borrowing and boost inflation, remain supportive of elevated US Treasury bond yields. This turns out to be another factor weighing on the lower-yielding JPY, though a softer risk tone helps limit deeper losses. The JPY bears might also refrain from placing aggressive bets and opt to wait on the sidelines ahead of the key central bank event risks. The Fed will announce its decision at the end of a two-day meeting later today, followed by the BoJ monetary policy update on Thursday.

Japanese Yen continues to be undermined by BoJ rate hike uncertainty

A report published by Japan's Ministry of Finance showed on Wednesday that the country's trade deficit unexpectedly improved in November and came in at ¥117.6 billion compared to October’s deficit of ¥462.1 billion.
The improvement was driven by strong growth in exports, which increased by 3.8% year-on-year in November amid a weaker Japanese Yen and a pickup in demand from Japan’s biggest trading partners – the US and China.
The upbeat reading, however, was offset by a 3.8% decline in Japanese imports, which, along with expectations that the Bank of Japan will not hike interest rates later this week, attracts fresh sellers around the JPY.
The yield on the benchmark 10-year US government bond shot to its highest level since November 22 following the release of US Retail Sales data, which underscored robust consumer spending and economic resilience.
The Commerce Department reported that sales at the retail level increased by 0.7% in November compared to the 0.5% growth recorded in the previous month, while sales ex Autos fell short of expectations and rose 0.2%.
The report, meanwhile, had little impact on market expectations that the Federal Reserve will lower borrowing costs for the third time, by 25 basis points at the end of a two-day policy meeting later this Wednesday.
However, signs that the progress towards bringing inflation back to the central bank's 2% target suggest that the Fed could adopt a more cautious stance and pause its rate-cutting cycle at the January policy meeting.
Hence, investors will scrutinize the updated economic projections, which include the so-called dot plot, and Fed Chair Jerome Powell's comments at the post-meeting press conference for cues about the rate-cut path.
The market attention will then shift to the crucial BoJ policy decision, scheduled during the Asian session on Thursday, which should further contribute to providing a fresh directional impetus to the USD/JPY pair.

USD/JPY could confront some resistance near 154.00; bullish potential seems intact

From a technical perspective, the emergence of some dip-buying on Wednesday comes on top of the recent breakout through the very important 200-day Simple Moving Average (SMA) and favors bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and are still far from being in the overbought territory, suggesting that the path of least resistance for the USD/JPY pair is to the upside. Any further move up, however, might face some resistance near the 154.00 mark ahead of the 154.45-154.50 region, or a three-week top touched on Monday. A sustained move beyond the latter should pave the way for a move towards reclaiming the 155.00 psychological mark. The momentum could extend further towards the next relevant hurdle near mid-155.00s en route to the 156.00 mark and the 156.25 supply zone.

On the flip side, the 153.15 area, or the overnight swing low, now seems to protect the immediate downside. Some follow-through selling below the 153.00 mark could drag the USD/JPY pair back towards the 200-day SMA pivotal support, near the 152.15 region. Failure to defend the said support levels might shift the bias in favor of bearish traders and make spot prices vulnerable to accelerate the slide towards the 151.00 round figure en route to the 150.00 psychological mark.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.