The Japanese Yen regains upward momentum as bets on a BoJ rate hike intensify
The yen is attracting fresh buying interest as a new trading week begins, with market participants eagerly awaiting Friday’s Bank of Japan policy decision. Expectations for a December rate rise have grown recently, driven by a shift in rhetoric from BoJ Governor Kazuo Ueda and by Japan’s inflation staying above the BoJ’s 2% target. Coupled with improving business confidence among Japan’s large manufacturers, these factors bolster the case for continued policy tightening and help support the yen as a safer asset in a risk-off environment.
Nevertheless, concerns over Japan’s mounting fiscal pressures—amplified by Prime Minister Sanae Takaichi’s expansive spending plans—could temper yen bulls and curb further gains. In contrast, the US dollar is hovering near its two-month low after markets priced in two more Federal Reserve rate cuts this year. This divergence between a potentially hawkish BoJ and a dovish Fed has kept the USD/JPY pair nudging below the mid-155.00s during the Asian session, reinforcing the case for further yen depreciation from that baseline.
Yen bulls gain ground as BoJ rate-hike expectations firm up
- The Bank of Japan’s quarterly Tankan survey released on Monday showed business sentiment among Japan’s large manufacturers improving, with the current-year index rising to 15 in Q4 2025 from 14 in Q3, and the Manufacturing Outlook rising to 15.0 from 12.0.
- A senior BoJ official noted that firms cited reduced policy uncertainty stemming from U.S. trade policy and resilient demand in high-tech sectors as key drivers of improved sentiment, while costs were being passed through and demand remained robust.
- Governor Ueda has signaled that the central bank is nearing its inflation target, reinforcing market bets on an imminent December rate hike and suggesting further tightening into 2026.
- Reports indicate that top ministers in Prime Minister Takaichi’s cabinet are not expected to oppose a BoJ move, though traders remain cautious and prefer to wait for additional guidance on policy direction before committing to long positions.
- The focus thus shifts to Ueda’s post-meeting press conference on Friday. At the same time, concerns about Japan’s fiscal path—exacerbated by the large spending plan—and sluggish growth act as headwinds for the yen.
- On the U.S. side, the dollar continues to struggle for buyers and sits near a two-month low amid expectations for fewer rate hikes rather than more. The Fed has signaled caution about additional cuts, though markets still anticipate two more reductions in the coming year.
- U.S. political developments—specifically discussions about replacing Jerome Powell as Fed chair and expectations that the new chair would support rate cuts—keep USD downside pressure in play, which supports the yen’s relative strength in some scenarios.
- Market participants are also eyeing upcoming U.S. macro releases, including the October Nonfarm Payrolls report (delayed) and the latest inflation data. In this context, the divergent policy paths of the BoJ and Fed help keep the yen’s posture nuanced and sensitive to new cues.
Technical read on USD/JPY near key moving-average levels
From a chart perspective, USD/JPY has struggled to reclaim above the 100-hour Simple Moving Average near 156.00, and the pullback suggests bearish potential. Nevertheless, positive momentum indicators on the daily chart imply near-term support around the 155.00 level. A decisive break below 155.00 could accelerate a decline toward the monthly low around 154.35, with a further slide toward 154.00 possible if momentum intensifies.
On the upside, the 100-hour SMA near 156.00 remains a near-term barrier. If prices sustain a move beyond Friday’s swing high in the 156.10–156.15 range, short-covering could push USD/JPY toward 157.00, with a continued push targeting the 157.45 interim hurdle and potentially approaching multi-month highs around 158.00, last seen in November.
Context on the yen’s role and policy backdrop
The Japanese Yen is among the world’s most actively traded currencies and is influenced by several forces, notably the health of the Japanese economy, BoJ policy, and the yield gap between Japanese and U.S. bonds, as well as risk sentiment.
Currency policy is a core mandate of the BoJ, and the central bank has intervened directly in currency markets at times to influence the yen’s value, though such moves are relatively infrequent due to political considerations with major trading partners. The BoJ’s long period of ultra-loose policy from 2013 through 2024 widened policy divergence with other central banks and helped the yen weaken. As the BoJ gradually unwinds that ultra-loose stance and other major central banks ease or pause, the yen has found some support.
Over the last decade, the gap between Japan’s policy stance and those of other major central banks, especially the U.S. Federal Reserve, widened, lifting the dollar against the yen. The 2024 shift by the BoJ toward a less accommodative posture, paired with easing in other large economies, has begun to narrow that differential.
Beyond policy gaps, the yen is often viewed as a safe-haven currency. In times of market stress, investors tend to prefer the yen for its perceived stability, which can cushion or even bolster the currency during turbulent episodes.
Bottom line: as the BoJ navigates its next decision and inflation trends, the yen could remain sensitive to policy signals, inflation data, and fiscal developments, while the dollar remains tethered to expectations about U.S. rate cuts and global risk sentiment.
