The Japanese yen strengthened past 152 per dollar, reaching its highest level in nearly two months, as expectations grow that the Bank of Japan (BOJ) will continue raising interest rates this year.
Japanese yen hits near two-month high
On Thursday, BOJ board member Naoki Tamura stated that the central bank must raise the policy rate to at least 1% in the latter part of fiscal 2025, signaling a shift toward tighter monetary policy. This statement has fueled speculation that the BOJ may take a more aggressive stance in the face of rising inflationary pressures, contributing to the yen’s appreciation against the US dollar.
Household spending increases
Recent data also revealed a 2.7% year-on-year increase in household spending in Japan, marking the first growth in five months and significantly surpassing the forecasted 0.2% gain. The robust spending growth reflects rising consumer confidence, driven in part by improving labor market conditions and the impact of wage increases. As the Japanese economy shows signs of recovery, domestic demand is strengthening, providing further support to the yen. Additionally, data earlier this week showed that real wages rose for the second consecutive month in December, with nominal wage growth reaching a near three-decade high, largely driven by a surge in winter bonuses. This growth in earnings has contributed to a boost in consumer spending, further encouraging expectations of a sustainable economic recovery in Japan.
Eyes on spring wage negotiations
Markets are now speculating that Japan's annual spring wage negotiations could result in another 5% increase this year, further supporting the notion that wages will continue to rise and provide additional impetus to the domestic economy. As a result, the yen has been buoyed by expectations of improved economic fundamentals, wage growth, and the potential for higher interest rates from the BOJ. With these factors in play, market participants are increasingly positioning themselves for a strengthening yen, which could continue to appreciate if the BOJ signals further policy tightening in the coming months.
