The Japanese yen slipped to around 151.8 per dollar on Tuesday, breaking a three-day rally, as the dollar strengthened following hawkish comments from U.S. Federal Reserve officials.
Japanese yen slips after three-day rally
They signaled that the Fed remains cautious about cutting interest rates too soon, citing persistent inflation risks, which bolstered demand for the greenback and weighed on the yen.
In Japan, economic data released on Monday provided a positive surprise, showing that the economy grew by 0.7% quarter-on-quarter in the fourth quarter of 2024, accelerating from 0.4% in the prior quarter and exceeding the 0.3% forecast. On an annualized basis, Japan’s GDP expanded by 2.8% in Q4, up from 1.7% in Q3 and in line with expectations. The strong economic performance was driven by solid consumer spending and business investment, reinforcing optimism about Japan’s recovery.
BoJ hawkish outlook expected
These figures support the case for a more hawkish outlook from the Bank of Japan (BOJ), which has been gradually moving away from its ultra-loose monetary policy stance. While there is still uncertainty over whether the BOJ will raise interest rates as soon as March, many analysts expect additional rate hikes later in the year as inflation remains above the central bank’s 2% target and wage growth strengthens. Some policymakers have also hinted at the possibility of phasing out the BOJ’s yield curve control program, which could further support the yen in the long term.
However, the yen remains vulnerable to external factors, particularly the widening interest rate differential between the U.S. and Japan. As long as the Fed maintains a higher-for-longer rate stance while the BOJ proceeds cautiously with policy tightening, the yen could struggle to gain significant ground against the dollar. This has kept market participants on high alert for any potential intervention from Japanese authorities, especially if the yen weakens further past the psychologically important 152 level.
Looking ahead, investors will closely monitor upcoming Japanese inflation and wage growth data for further clues on the BOJ’s policy trajectory. Additionally, any shifts in the Fed’s tone or global risk sentiment could heavily influence yen movements in the near term.
