The Japanese Yen (JPY) continues to face downward pressure during the Asian session on Friday, slipping closer to a multi-month low against the US Dollar (USD). The decline follows disappointing economic data, with Japan’s real household spending falling for the fourth consecutive month in November, signaling underlying economic fragility. This weak spending data further complicates the Bank of Japan‘s (BoJ) decision on interest rate hikes, reinforcing a cautious outlook for the JPY.
The widening bond yield gap between the US and Japan over the past month, driven by the Federal Reserve’s hawkish stance, has exacerbated the outflow of capital from the low-yielding JPY. With a stronger USD and the yield differentials widening, the USD/JPY pair benefits from these dynamics. However, traders are likely to adopt a wait-and-see approach ahead of the critical US Nonfarm Payrolls (NFP) report, which is set for release later today.
Economic Strain in Japan and BoJ Uncertainty
Japanese officials are raising concerns over the nation’s economic trajectory. Japan’s Economy Minister Ryosei Akazawa stated on Friday that the country’s economy is at a “critical stage” as it strives to overcome a deflationary mindset and shift towards a growth model driven by higher wages and increased investment.
Data revealed that inflation-adjusted household spending in Japan fell by 0.4% year-on-year in November, marking a fourth consecutive month of decline. This highlights persistent inflationary pressures, with real wages also dropping for the fourth straight month. These developments suggest that the BoJ may still consider another interest rate hike in early 2025, potentially in January or March.
However, some investors speculate that the BoJ may hold off on tightening until April, awaiting evidence of sustained wage growth following the spring wage negotiations between labor unions and companies.
US Dollar and Federal Reserve’s Impact
On the other side of the Pacific, US bond yields remain elevated, with the benchmark 10-year US government bond yield holding near its highest levels since mid-2024. This rise is partly due to the Federal Reserve’s more aggressive stance on monetary policy following its December meeting. Federal Reserve officials have indicated a cautious, data-driven approach to rate cuts, with some acknowledging the prolonged path to reaching the 2% inflation target.
The US Dollar has remained robust, approaching a two-year high, and is supporting the USD/JPY pair, which continues to hover above the 158.00 mark. Traders are eagerly awaiting the release of the US Nonfarm Payrolls data later today, which could further influence market sentiment.
Technical Outlook for USD/JPY
From a technical standpoint, the short-term bias favors bullish sentiment for the USD/JPY pair. However, recent range-bound trading suggests caution, with traders advised to wait for stronger buying signals before positioning for further upside. The key resistance level is around 158.55, which marks the recent multi-month high. A break above this level could propel the pair toward the psychological 160.00 mark.
On the downside, the 157.60-157.55 region could provide immediate support. If this level is broken, the USD/JPY pair could face further declines, with the next support zones at 157.00 and 156.75-156.20. A decisive move below 156.00 could shift the bias toward a bearish outlook, opening the door for deeper losses.
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