Yen on the rise: Will the Bank of Japan hold its dovish stance?

The Japanese yen reached 143.50 against the dollar on Tuesday, 9 January 2024. This swing, however, comes amidst a backdrop of mixed signals and uncertainties surrounding the Bank of Japan's (BOJ) monetary policy trajectory.

The Bank of Japan’s plan to pivot from its dovish stance may have been affected by the need to assess the adverse impact of the 1 January Noto Peninsula disaster on the economy. Plus, falling inflation rates in Tokyo reaffirmed speculations that the BoJ will not exit the negative interest rates policy in January.

Inflationary pressures and Tokyo’s leading indicator

Tokyo's core consumer price index (CPI) climbed 2.1% year-on-year in December, aligning with market expectations and following November’s 2.3% increase. This data, closely monitored as a leading indicator of nationwide trends, will be a focal point for the BOJ’s upcoming policy meeting on January 22-23.

BOJ Governor Kazuo Ueda emphasised the need for continued monetary easing until current cost-push inflation transitions to a demand-driven price surge supported by robust wage gains. However, concerns arise from declining household spending, which fell for the ninth consecutive month in November, underscoring the fragility of the Japanese economy.

Analysts anticipate the BOJ’s quarterly meeting with regional branch managers in January to offer insights into policymakers’ confidence regarding sustained wage growth.

Global macroeconomic influences

Meanwhile, the global spotlight turns to the US Consumer Price Index (CPI) this week. A higher-than-expected reading could dampen expectations of an imminent rate cut by the Federal Reserve. Following a strong U.S. employment report, Fed fund rate futures currently indicate a 57.3% probability of a rate cut in March.

Technical analysis of USD/JPY suggests further upside resistance at the 61.8% retracement level of 147.44, with support near 140.

‍

As the global economic landscape undergoes transformation, further developments in the market are eagerly awaited. These shifts, coupled with domestic considerations, will ultimately shape the BOJ's policy trajectory and the fate of the yen.

What this means

On 25 December 2023, BOJ Governor Kazuo Ueda highlighted the potential positive aspects of higher interest rates in normal economic conditions. While reiterating a commitment to pursue stable inflation through monetary easing patiently, the minutes indicate that the Governor is inclined to wait for the April wage results. 

A shift away from ultra-loose monetary policies by the BOJ or an earlier-than-expected rate cut by the Fed could contribute to a heightened sentiment favouring the purchase of yen.