Yen Rebounds as Bank of Japan Signals Potential Rate Hike, Cuts Bond Purchases
The Japanese yen experienced a resurgence against the dollar on Friday, reversing its recent slide, after the Bank of Japan (BOJ) hinted at a potential interest rate increase in the near future. A summary of opinions from the December policy meeting revealed growing confidence among some policymakers in the conditions necessary for an imminent rate hike, with at least one member predicting such a move in the short term. This development, coupled with the BOJ’s decision to further reduce its monthly bond purchases, provided a boost to the yen, which had fallen to a five-month low against the dollar earlier in the week.
The BOJ maintained its current interest rate at 0.25% in December, a decision Governor Kazuo Ueda attributed to the need for further assessment of wage growth momentum in the coming year and clarity on the economic policies of the incoming U.S. administration. However, the central bank’s move to reduce its monthly bond purchases by another 410 billion yen ($2.6 billion), lowering the total to approximately 4.5 trillion yen per month starting in January, signals a potential shift towards a tighter monetary policy. This reduction in bond purchases could be interpreted as a precursor to an eventual interest rate hike, as it gradually removes liquidity from the market.
The yen’s recent weakness against the dollar stemmed from rising U.S. Treasury yields, even as the Federal Reserve has been cutting interest rates. Market expectations suggest fewer Fed rate cuts next year due to persistent inflation, making traders hesitant to bet against the dollar. The anticipated policies of the incoming Trump administration, projected to stimulate growth and potentially exacerbate inflation, further bolster the dollar’s appeal.
Despite the current strength of the dollar, some analysts predict an eventual yen rebound, anticipating a decline in U.S. Treasury yields. Kit Juckes, an analyst at Societe Generale, suggests that the yen’s fair value is reaching its peak and could move towards the mid-130s against the dollar by the end of next year. This projection is based on the possibility of a BOJ rate hike in the first quarter of next year and a subsequent decline in Treasury yields.
Japanese authorities have intervened multiple times this year to support the yen, and further intervention remains a possibility if the currency continues to depreciate. Finance Minister Katsunobu Kato reiterated his concerns about the yen’s decline on Friday, warning of potential action against excessive currency movements. The dollar retreated from its recent highs against the yen following the BOJ’s announcements, providing some relief to the Japanese currency.
Beyond the yen-dollar dynamics, other currencies experienced significant fluctuations. The euro, while gaining slightly against the dollar on Friday, is still poised for a yearly decline. Sterling also saw a modest gain, but remains on track for an annual loss. The Chinese yuan, meanwhile, neared a 13-month low against the dollar, pressured by the threat of further U.S. tariffs on Chinese goods under the Trump administration. South Korea’s won also plummeted to a 16-year low against the dollar amidst political turmoil following the impeachment of the acting president. In the cryptocurrency market, bitcoin experienced a decline, although it has seen substantial gains throughout the year. These currency movements reflect a complex interplay of economic and political factors, with central bank policies and trade tensions playing significant roles.
