Yen weakens on positive market sentiment

As the market becomes more optimistic and favours riskier currencies over safe havens like the Yen, the value of the Japanese yen has declined at the beginning of the week. At its most recent meeting, the Bank of Japan sent conflicting signals, stating that it is still easing while also normalizing.

Given that it is generally expected that the Fed will maintain current interest rates, the USD/JPY is beginning to weaken. Given that the Japanese Yen has lost more than 33% of its value since 2021, the day’s brief weakness is consistent with the longer-term trend.

The Bank of Japan’s policy of maintaining interest rates below zero during a period when the majority of other central banks were hiking interest rates to combat inflation was the primary cause of the weakness. The Yen lost ground to other currencies as international investors tended to favour placing their money where it could yield the highest risk-free returns.

The rate differential that previously hurt the Yen so much may be closing in light of recent signs that many central banks have reached or are approaching their peak interest rate. The Yen may begin a recovery rally if the BoJ keeps normalizing policy and other central banks either stop raising rates or even start lowering them.

The upcoming major data release for Japan is Labour Cash Earnings for September, which is anticipated to show a 1% YoY increase. Additionally, the release of Overall Household Spending for the same month is anticipated to show a -2.7% YoY change.

The Yen is unlikely to gain much traction if both metrics match estimates because it will imply the muted earning and spending cycle of previous years, which has kept BoJ policy so accommodating.

Following the release of the October Nonfarm Payrolls report on Friday, which indicated a weakening of most labour metrics in October and suggested the Federal Reserve might be done raising interest rates, the Yen gained value relative to the US Dollar.