The Japanese Yen (JPY) saw a partial rebound against the US Dollar (USD) on Thursday, after trimming some of its intraday gains. Despite strong wage growth data from Japan and increasing inflationary pressure supporting the case for a rate hike by the Bank of Japan (BoJ), the JPY’s gains are capped by the widening US-Japan rate differential and ongoing speculation about the BoJ’s policy actions. Additionally, concerns over US President-elect Donald Trump’s protectionist stance and geopolitical risks are offering the JPY support as a safe-haven asset.
Strong Wage Growth Data Underpins the JPY, But Timing of BoJ Rate Hike Remains Uncertain
Data released by the Japanese government earlier on Thursday showed that base salary (or regular pay) in Japan rose 2.7% in November, marking the fastest increase since 1992. Overtime pay also grew by 1.6%, up from a revised 0.7% gain in October. However, despite this positive wage growth, real wages (adjusted for inflation) fell by 0.3% in November for the fourth consecutive month. The inflation rate used for wage calculations also rose from 2.6% in October to 3.4% year-on-year in November.
The BoJ has emphasized that sustained, broad-based wage hikes are a key condition for raising interest rates, and these latest wage data lend credence to the idea of a potential policy tightening. However, the market remains uncertain about the timing of such a move, with many investors expecting the BoJ to wait until at least March before acting.
The cautious outlook is also due to the uncertain global environment, particularly the potential for US President-elect Donald Trump to implement protectionist economic policies. Reports have suggested Trump is considering declaring a national economic emergency to justify universal tariffs on both allies and adversaries, which could have far-reaching economic implications.
Widening US-Japan Rate Differential Limits JPY Gains
Meanwhile, the yield on the US 10-year Treasury bond has surged to its highest level since April 25, partially in response to reports about Trump’s protectionist policy plans. The rise in US bond yields has further fueled the widening interest rate differential between the US and Japan, a key factor in limiting the JPY’s gains. Investors remain cautious about the BoJ’s actions, as its current monetary stance is more dovish compared to the hawkish shift seen by the Federal Reserve (Fed).
The Fed’s December meeting minutes revealed that policymakers are in favor of slowing the pace of rate cuts in response to concerns over persistent inflationary pressures. Fed Governor Christopher Waller indicated that inflation should continue to fall in 2025, enabling the US central bank to reduce interest rates further, though the pace remains uncertain. This dovish stance, alongside solid US employment data, has contributed to maintaining support for the USD.
Mixed US Employment Data and Fed Speeches Set to Influence USD/JPY
The US saw mixed labor market data on Wednesday. The Automatic Data Processing (ADP) report indicated that private sector employment rose by 122,000 in December, below the market expectations of 140,000 and down from 146,000 in November. However, the US Department of Labor reported that new jobless claims fell to a low of 201,000 in the week ending January 4, signaling a stable labor market.
Looking ahead, investors will continue to watch the speeches of influential Federal Open Market Committee (FOMC) members on Thursday, as these could provide additional guidance on the future path of US interest rates. The focus will also shift to the highly anticipated US Nonfarm Payrolls (NFP) report on Friday, which is expected to be a key factor in determining market sentiment and the USD’s strength against the JPY.
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