• The Japanese Yen retains bullish bias as BoJ rate hike bets offset dismal Household Spending data.
  • Dovish Fed expectations fail to assist the USD in attracting buyers and keep a lid on the USD/JPY pair.
  • Traders keenly await the US PCE Price Index for Fed rate-cut cues and a fresh directional impetus.

The Japanese Yen (JPY) continues with its relative outperformance against a broadly weaker US Dollar (USD) through the Asian session on Friday and climbs back closer to a nearly three-week high, touched the previous day. Data released earlier today showed that Household Spending in Japan unexpectedly fell at the fastest pace in nearly two years in October. The JPY buying, however, remains unabated amid rising bets for an imminent Bank of Japan (BoJ) rate hike, bolstered by Governor Kazuo Ueda's remarks earlier this week.

Furthermore, a reflationary push by new Prime Minister Sanae Takaichi keeps Japanese government bonds (JGB) yields elevated and underpins the lower-yielding JPY. Apart from this, the cautious mood around the equity markets is seen as another factor benefiting the safe-haven JPY. The US Dollar (USD), on the other hand, struggles to capitalize on the overnight recovery from its lowest level since late October amid dovish Federal Reserve (Fed) expectations and further weighs on the USD/JPY pair ahead of the key US inflation data.

Japanese Yen continues to be underpinned by hawkish BoJ expectations

  • Data published by Japan's Internal Affairs Ministry showed this Friday that Household Spending fell 2.9% YoY in October 2025, missing market expectations for a 1.0% rise and reversing a 1.8% gain in the prior month. This also marked the first decline since April and the fastest pace of fall since January 2024, raising concerns about the economic outlook.
  • The Japanese Yen, however, remains on the front foot amid prospects for further Bank of Japan tightening. In fact, BoJ Governor Kazuo Ueda said on Monday that the central bank would consider the pros and cons of raising the policy rate at the December 18-19 meeting. This was seen as the clearest hint so far of an impending rate hike and underpins the JPY.
  • Adding to this, Japanese Prime Minister Sanae Takaichi's massive spending plan, to be funded by new debt issuance, has been a key factor behind the recent sharp rise in government bond yields over the past month. The yield on the benchmark 10-year JGB surged to its strongest level since 2007 on Thursday, while the 20-year reached a level not seen since 1999.
  • Furthermore, the 30-year JGB yield hit a record high, resulting in a further narrowing of the rate differential between Japan and other major economies. This raises the risk of the carry trade unwinding and further benefits the JPY. However, rising bond yields mean higher borrowing costs, which fuel concerns about Japan's fiscal situation and keep a lid on the JPY gains.
  • The US Dollar staged a modest recovery from a six-week trough on Thursday and drew support from a duo of upbeat US labor market reports. In fact, Global outplacement firm Challenger, Gray & Christmas said that planned job cuts declined 53% to 71,321 in November, from 153,074 in the previous month, which was the highest for an October month since 2003.
  • Adding to this, the US Labour Department reported that the number of Americans filing new applications for unemployment benefits decreased by 27,000 to 191,000 in the week ended November 29. This marked the lowest level in more than three years, which eased fears of a sharp deterioration in labor market conditions and prompted some USD short-covering.
  • Despite the supportive data, the USD struggles to attract any follow-through buying amid the growing acceptance that the Federal Reserve will lower borrowing costs again at next week's policy meeting. This fails to assist the USD/JPY pair in registering any meaningful recovery from a nearly three-week low set on Thursday and backs the case for further losses.
  • Traders, however, seem reluctant and opt to wait for the release of the US Personal Consumption Expenditure (PCE) Price Index before placing fresh directional bets. The crucial inflation data will play a key role in influencing expectations about the Fed's rate-cut path, which, in turn, will drive the USD and provide some meaningful impetus to the USD/JPY pair.

USD/JPY seems poised to prolong a two-week-old descending trend

The recent repeated failures to move back above the 100-hour Simple Moving Average (SMA) and the overnight breakdown below the 155.00 psychological mark favor the USD/JPY bears. Furthermore, technical indicators on hourly charts are holding in negative territory and back the case for a further depreciating move, though neutral oscillators on the daily chart warrant some caution. Hence, any further intraday slide could find some support near the overnight swing low, around mid-154.00s, below which spot prices could accelerate the downfall towards the 154.00 round figure.

On the flip side, any meaningful recovery attempt is likely to confront a stiff barrier near the 155.40 region, or the 100-hour SMA. A sustained strength beyond might trigger a short-covering move and allow the USD/JPY pair to reclaim the 156.00 mark. Some follow-through buying should pave the way for a further move up to the next relevant hurdle near the 156.60-156.65 region en route to the 157.00 round figure.

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

Source: Fxstreet