The USD/JPY pair posts modest gains around 156.70 during the early Asian session on Thursday. The Japanese Yen (JPY) softens against the US Dollar (USD) as demand for safe-haven assets cools after geopolitical tensions. Traders will keep an eye on the US Initial Jobless Claims data later on Thursday. On Friday, the US December employment report will be in the spotlight.
The shocking capture of Venezuelan President Nicolas Maduro by the United States (US) over the weekend had a short-lived impact on most asset classes, particularly in currencies. Furthermore, the US Services Purchasing Managers’ Index (PMI) hit a 14-month high in December, which contributed to the Greenback’s upside.
Data released by the Institute for Supply Management (ISM) on Wednesday showed that the US Services PMI rose to 54.4 in December from 52.6 in November. This figure came in stronger than the expectation of 52.3.
However, dovish US Federal Reserve (Fed) expectations might weigh on the USD against the JPY. Traders anticipate two rate cuts in 2026, with the first expected to appear in April and the second no later than September.
On the other hand, the growing acceptance that the Bank of Japan (BoJ) will stick to its policy normalization path could provide some support to the JPY. BoJ Governor Kazuo Ueda said on Monday that the Japanese central bank will continue raising rates if economic and price developments move in line with forecasts. Ueda further stated that adjusting the degree of monetary support will help the economy achieve sustained growth and that wages and prices are likely to rise together moderately.
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.
