The USD/JPY pair is trading marginally near 156.50 during the European trading session on Tuesday. The pair is rising as the US dollar recovers from early losses and turns marginally positive, with investors turning their attention to US non-farm payrolls data for December which will be released on Friday.
At the time of writing, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, is trading slightly higher near 98.45.
Earlier in the day, the US dollar performed poorly as market sentiment remained favorable for riskier assets. Sentiment has shifted to risk appetite as investors digest market jitters spurred by the US military operation in Venezuela.
Going forward, investors will pay close attention to US NFP data as the latest comments from Federal Reserve officials have suggested they are concerned about downside risks in the labor market rather than concerns about persistent inflation pressures.
Before the release of the US NFP data, investors will focus on the US ADP employment change data, the December ISM services PMI data, and the November JOLTS job openings data.
Meanwhile, the Japanese yen (JPY) was broadly weak even after Bank of Japan (BoJ) Governor Kazuo Ueda indicated there would be more interest rate hikes in the near term. “The Bank of Japan expects to continue raising interest rates if the economy and prices move in line with our expectations,” Governor Ueda said on Monday, adding that adjusting the degree of monetary support would help achieve “sustainable growth and stable inflation.”
Bank of Japan Frequently Asked Questions
The Bank of Japan (BoJ) is Japan’s central bank, which sets the country’s monetary policy. Its mission is to issue banknotes and implement currency and monetary controls to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked on an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy relies on quantitative and qualitative easing (QQE), or printing banknotes to purchase assets such as government bonds or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and eased its policy by first offering negative interest rates and then directly controlling the yields of its 10-year government bonds. In March 2024, the Bank of Japan raised interest rates, effectively reversing its ultra-loose monetary policy stance.
The massive incentives offered by the bank caused the value of the Japanese yen to decline against major currencies. This process was exacerbated in 2022 and 2023 by the growing policy divergence between the Bank of Japan and other major central banks, which chose to increase interest rates sharply to combat decades-long high levels of inflation. The Bank of Japan’s policy led to a widening of the spread with other currencies, which led to a decline in the value of the Japanese yen. This trend was partially reversed in 2024, when the Bank of Japan decided to abandon its overly accommodating policy stance.
The weakness of the Japanese yen and rising global energy prices led to an increase in Japanese inflation, which exceeded the Bank of Japan’s target of 2%. The prospect of higher salaries in the country – a key element fueling inflation – also contributed to the move.
