Japanese Yen gains as wage growth fuels BoJ rate hike expectations

The Japanese Yen (JPY) attracts some dip-buying at the start of a new week and remains close to its highest level since November 14, touched against a weaker US Dollar (USD) on Friday. Japan’s wage growth data reaffirmed market bets for an imminent rate hike by the Bank of Japan (BoJ) in December, which helps offset the dismal Q3 GDP print and provides a modest lift to the JPY. Apart from this, the cautious market mood is seen as another factor that benefits the JPY’s relative safe-haven status.

Meanwhile, hawkish BoJ expectations keep the Japanese government bond (JGB) yields close to a multi-year peak. The resultant narrowing of the rate differential between Japan and other major economies further benefits the lower-yielding JPY. The USD, on the other hand, languishes near its lowest level since late October amid bets that the Federal Reserve (Fed) will cut rates again this week, and turns out to be another factor exerting pressure on the USD/JPY pair during the Asian session.

Japanese Yen benefits from firming expectations for an imminent BoJ rate hike in December

• Government data showed earlier this Monday that Japan’s Nominal Wages rose 2.6% YoY in October, surpassing expectations of 2.2% and marking the strongest increase in three months. However, inflation-adjusted real wages shrank for the 10th consecutive month, by 0.7% from a year earlier, amid the 3.4% rise in consumer prices.
• This adds pressure on the Bank of Japan amid speculation that policymakers may opt for another rate hike at its December policy meeting and provides a modest lift to the Japanese Yen during the Asian session. The uptick seems unaffected by the revised Q3 GDP, showing Japan’s economy contracted faster than initially reported.
• The revised Gross Domestic Product report from the Cabinet Office revealed that Japan’s economy shrank 0.6% in the July-September period compared with the initial estimate of 0.4%. On a yearly basis, the economy contracted by 2.3%, or its fastest pace since Q3 2023, vs the forecast for a 2.0% fall and 1.8% fall reported originally.
• Investors, however, seem convinced that higher wages will increase household purchasing power and boost spending, which should fuel demand-driven inflation and bolster the economy. Furthermore, BoJ Governor Kazuo Ueda said last week that the likelihood of the economic and price projections being met is rising.
• This, along with Prime Minister Sanae Takaichi’s reflationary push and massive spending plan, lifted the benchmark 10-year Japanese government bond (JGB) yield to its strongest level since 2007 last Thursday. Moreover, 20-year and 30-year JGB yields reached levels not seen since 1999, further underpinning the JPY.
• In contrast, the CME Group’s FedWatch Tool indicates that traders are currently pricing in a nearly 90% chance that the US Federal Reserve (Fed) will lower borrowing costs again on Wednesday. This, in turn, keeps the US Dollar depressed near its lowest level since late October and exerts pressure on the USD/JPY pair.
• The USD bears, however, might refrain from placing aggressive bets and opt to wait for more cues about the Fed’s rate-cut path. Hence, the focus will remain glued to the updated economic projections, including the so-called dot plot, and Fed Chair Jerome Powell’s comments during the post-meeting press conference.

USD/JPY could find support near Friday’s swing low, around 154.35, ahead of the 154.00 mark

The USD/JPY pair continued with its struggle to move back above the 100-hour Simple Moving Average (SMA) on Friday, and the subsequent slide favors bearish traders. Furthermore, technical indicators on hourly charts are holding in negative territory and back the case for additional losses, though neutral oscillators on the daily chart warrant some caution. Hence, any further intraday slide could find some support near Friday’s swing low, around the 154.35 region, below which spot prices could fall to the 154.00 round figure.

On the flip side, any meaningful recovery attempt is likely to confront a stiff barrier near the 155.35 region, or the 100-hour SMA. Some follow-through buying beyond Friday’s swing high, around mid-155.00s, might trigger a short-covering move and allow the USD/JPY pair to reclaim the 156.00 mark. The momentum could extend further towards the next relevant hurdle near the 156.60-156.65 region en route to the 157.00 round figure.