The Japanese yen weakened in Asian trading on Monday, sliding into negative territory against a basket of major currencies, including the US dollar. The yen is approaching five-month lows as it faces downward pressure from a surge in US Treasury yields.
Diverging Views Among Japanese Policymakers
The yen’s movement comes amid ongoing divisions among Japanese policymakers regarding the timeline and approach to monetary policy normalization. Investors are closely watching for further signals on the Bank of Japan’s (BOJ) policy direction in the coming months.
Market Performance
The USD/JPY pair climbed over 0.4% on Monday, reaching 157.83 yen per dollar, with an intraday low of 157.14. On Friday, the yen managed to gain nearly 0.2% against the dollar, snapping a three-day losing streak and moving away from its five-month low of 158.08. Last week, the yen also recorded a 0.35% weekly gain against the dollar—its first weekly advance since late November—as Japanese authorities issued warnings about the currency’s excessive depreciation.
Interest Rate Expectations in Japan
Market participants are increasingly focused on the BOJ’s next moves, with current odds of a 0.25% interest rate hike in January standing at 55%. Investors are awaiting additional inflation and labor market data to gain a clearer picture of the BOJ’s intentions.
Recent meeting minutes from the BOJ revealed differing opinions among policymakers. While some expressed confidence in raising interest rates in the near term, others remained cautious due to lingering uncertainties over wage growth and global economic factors. BOJ Governor Kazuo Ueda stated in December that the bank expects the Japanese economy to sustainably reach its 2% inflation target next year.
US Treasury Yields and Dollar Strength
US 10-year Treasury yields advanced by 0.65% on Monday, extending their gains for a second consecutive session and nearing seven-month highs. The rise in yields bolstered the US dollar’s position in global markets.
According to the FedWatch tool, the probability of a 0.25% interest rate cut by the Federal Reserve in January remains low, at just 11%. This hawkish stance by the Federal Reserve continues to lend support to the dollar while putting additional pressure on the yen.
Outlook
The interplay between Japanese monetary policy uncertainty and the strength of US Treasury yields is expected to keep influencing the yen’s performance in the near term. Investors will remain focused on key economic indicators and central bank communications from both Japan and the United States as they navigate the evolving landscape.
