December rate hike prospects lift Japanese Yen as BoJ Minutes strike hawkish tone

Inflation is approaching the 2% target. BoJ Meeting Minutes confirm support for rate increases among policymakers, strengthening sentiment towards JPY.
Trump's comments on the Middle East triggered a retreat in crude prices, putting pressure on energy costs and the US Dollar.
78%+ odds of a December Fed rate increase and robust US Nonfarm Payrolls limit the scope for USD/JPY declines.

USD/JPY trades near 158.00 in Monday's European session. The pair is retreating after modest gains the previous day as the Japanese Yen (JPY) strengthens. Supporting the Yen, Bank of Japan (BoJ) Meeting Minutes signal that policymakers stand ready to step up monetary tightening.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Although the BoJ left interest rates unchanged at its previous meeting, its emphasis on addressing inflation risks reinforced market expectations of a December increase. Minutes from the September meeting showed broad agreement that additional rate rises are appropriate, with underlying inflation approaching the central bank's 2% target.

Former BoJ chief economist Seisaku Kameda added to the hawkish message. He said the central bank is likely to raise rates in December and lift borrowing costs further towards 2% next year to contain persistent price pressures.

Yen attracts safe-haven demand over Dollar

Recent risk aversion has strengthened the Yen's safe-haven standing, according to strategists at ABN Amro. As investors sought defensive currency exposure, they noted that “haven demand favoured the JPY over the USD”.

Lower energy prices are also weighing on the US Dollar (USD), adding pressure to USD/JPY. Oil retreated after US President Donald Trump described further military action against Iran as "highly unlikely," provided progress on Iran's nuclear programme continues and the Strait of Hormuz stays open. Trump also acknowledged that the unpopular Middle East conflict had earlier pushed up energy costs and contributed to recent Republican losses in the midterm elections.

Strong US labour market figures nevertheless constrain the Dollar's downside by reinforcing expectations of further monetary tightening. The CME FedWatch tool puts market-implied odds of a 25-basis-point increase at the December Federal Open Market Committee (FOMC) meeting above 78%, following a sharp rise. October Nonfarm Payrolls (NFP) underpin that hawkish outlook: employment rose by 165,000, well ahead of the 65,000 consensus forecast and following September's revised 60,000 increase. The Unemployment Rate also fell to 4.1%, below the 4.2% forecast. For clearer guidance on the Federal Reserve's policy path, investors now await Tuesday's Consumer Price Index (CPI) and Friday's Producer Price Index (PPI) releases.

Japanese Yen: Key Questions

Key drivers of the Japanese Yen

Among the world's most actively traded currencies, the Japanese Yen (JPY) broadly reflects Japan's economic performance. More specific influences include Bank of Japan policy, the gap between Japanese and US bond yields, and traders' appetite for risk, alongside other factors.

Bank of Japan policy and the Yen

Currency control is one of the Bank of Japan's mandates, making its actions a major influence on the Yen. Direct intervention in currency markets has occasionally been used, usually to weaken the currency. However, political concerns among Japan's main trading partners discourage frequent intervention. Between 2013 and 2024, the BoJ's ultra-loose monetary stance weakened the Yen against its major peers as policy increasingly diverged from that of other leading central banks. The subsequent gradual withdrawal of this ultra-loose policy has offered the Yen some support.

Japanese-US bond yield spreads and the Yen

By maintaining ultra-loose monetary policy over the past decade, the BoJ increasingly diverged from other central banks, especially the US Federal Reserve. The resulting widening in the yield gap between 10-year US and Japanese bonds supported the US Dollar against the Japanese Yen. That gap is now narrowing as the BoJ gradually withdraws its ultra-loose stance following its 2024 decision, while other major central banks cut interest rates.

Risk sentiment and demand for the Yen

Investors often regard the Japanese Yen as a safe-haven asset. During periods of market stress, its perceived reliability and stability make them more likely to move funds into the currency. As a result, turbulence is likely to lift the Yen against currencies considered riskier investments.