The USD/JPY pair posts modest gains near 158.45 during the early Asian session on Friday. The Japanese Yen (JPY) softens against the US Dollar (USD) following the release of Japanese inflation data. All eyes will be on the Bank of Japan (BoJ) interest rate decision and the press conference later on Friday.
Data released by the Japan Statistics Bureau showed on Friday that Japan’s National Consumer Price Index (CPI) rose by 2.1% YoY in December, compared to the previous reading of 2.9%. This figure registered its weakest level since March 2022.
Meanwhile, the National CPI ex Fresh food came in at 2.4% YoY in December versus 3.0% prior. The figure came in line with the market consensus and was also at its weakest level since October 2024. CPI ex Fresh Food, Energy rose 2.9% YoY in December, compared to the previous reading of 3.0%.
The Japanese Yen edges slightly lower against the Greenback in an immediate reaction to the softer inflation report. Signs of cooler inflation could lower the urgency for the BoJ to raise interest rates further.
However, the BoJ is widely expected to hold its policy rate steady at around 0.75% at the conclusion of its two-day meeting on Friday. The Japanese central bank last raised its rate to the highest in three decades in December 2025. Traders await additional clues from Governor Kazuo Ueda’s press conference regarding the expected timing of the BoJ’s next rate hike.
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
