The USD/JPY pair loses traction to around 150.95 during the early Asian session on Friday. The Japanese Yen (JPY) edges higher after the hotter-than-expected Japan’s Tokyo Consumer Price Index (CPI) inflation report for November. Data released by the Statistics Bureau of Japan on Friday showed that the headline Tokyo Consumer Price Index (CPI) climbed by 2.6% YoY in November, compared to 1.8% in the previous month. Meanwhile, the Tokyo CPI ex Fresh Food, Energy rose by 2.2% YoY in November versus 1.8% prior. Tokyo CPI ex Fresh Food increased 2.2% YoY in November, compared to a 1.8% increase in October, and was above the market consensus of 2.1%. The core CPI has stayed above the Bank of Japan’s (BoJ) 2% target and kept alive market expectations for a near-term interest rate hike.

This, in turn, boosts the JPY and creates a headwind for USD/JPY. BoJ Governor Kazuo Ueda stated the Japanese central bank will keep raising rates if inflation remains on track to stably hit 2% as it projects.On the other hand, Wednesday's US PCE data indicated that the progress on lowering inflation appears to have stalled in recent months, which could diminish the expectation for the Federal Reserve (Fed) to cut interest rates in 2025. This might trigger a modest bounce in the US bond yields, which provides some support to the Greenback. The markets are now pricing in nearly 62.8% odds that the Fed will cut rates by a quarter point in December, up from 55.7% earlier this week, according to the CME FedWatch Tool.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.

Source: FXSTREET

Appetite on Wednesday was limited on both sides of the Atlantic Ocean. In the US, the crowded economic data came in mostly in line with expectations, confirming that the US economy grew 2.8% in Q3 – mostly explained by a robust 3% growth in sales, price pressures were slightly higher than expected but remained below 2%, as core PCE prices for last quarter decelerated faster than expected. Core PCE prices for October, however, posted a small uptick from 2.7% to 2.8%, parallel to market expectations and the initial jobless claims came in softer than pencilled in. Overall, there was no big surprise in recent data. And the latter gave comfort to investors that the Federal Reserve (Fed) will cut its rates by another 25bp when it meets in December. That probability advanced from around 65% to 68% and the US 2-year yield tipped a toe below the 4.20% level.

But the lower yields, and the first day of ceasefire between Israel and Hezbollah, couldn’t convince investors to buy more US equities into the Thanksgiving holiday. The aggressive reaction from both Mexico and Canada to Trump’s latest tariff threats certainly revived worries of higher business costs and lower profits. As such, the S&P500 closed Wednesday’s session a few points below the 6000 mark, Nasdaq 100 retreated 0.85% as Dow Jones closed in the negative after hitting a fresh record. Microsoft dropped more than 1% on fresh news that the FTC opened a fresh antitrust investigation into the company ‘drilling into everything’ – yes everything they do – while Apple resisted to the news that its iPhone sales barely grew this year as Android-based rivals gained ground in China and in other emerging markets.

Meme news. A drone company called Unusual Machines rallied 110% on news that Donald Trump Jr. – yes Trumps’s eldest son — has joined the company’s advisory board reminding ‘the need for drones is obvious’ and that they must ‘stop buying Chinese drones and Chinese drone parts’. Interestingly, the company warned in a regulatory file that Trump’s proposed tariffs on China could affect its ability to source drones critical to its B2C business.

Le drame

In Europe, things were much less fun – as it is usually the case. The Stoxx 600 extended losses, and not only because of Trump’s tariff threats, but also on the rising unease in French politics, where Marine Le Pen, the far-right leader – who gained ground in the latest elections, remember? – threatened Michel Barnier’s administration – that’s doing its best to control the country’s deteriorating finances and deficit – that she would bring his government down with a no-confidence vote if he doesn’t respect their budget demands.

Needless to say that the spread between the French and German 10-year yields is rising again, even though Germany has its own political problems – mind you – and is preparing to hold a snap election because people, there, are not happy with Scholz’s government either.

Thank God, the growing French headache remains localized, for now. The French CAC40 underperformed its European peers as French bank stocks took a hit on the political chaos, but the EURUSD rebounded well past the 1.05 level – and even advanced near 1.0590 recently following the other majors up against a broadly weakened US dollar. The worsening political scene in France and the widening yield gap between France and Germany, could however limit the single currency’s upside potential along with clashing opinions from the European Central Bank (ECB) members about how fast the bank should cut rates. ECB’s Schnabel said that the borrowing costs are no longer at a level that retrains the economy, while Luis de Guindos said – a day earlier – that more rate cuts were on their way. One thing is clear, though: while German representatives often sound more hawkish than their southern counterparts, Germany’s economy arguably relies on ECB support more than any other in the union at this point.

For now, the EURUSD has potential to extend a recovery following an aggressive selloff in November. Today, Germany and Spain will reveal their November early CPI figures. The figures are expected to print an uptick in price pressures this month. If that’s the case, the ECB doves could lose ground and let the euro bulls gain field. Also note that, the latest rise in European nat gas prices will somehow impact the inflation numbers in the coming months, and Europe is said to be facing the coldest winter since Russia invaded Ukraine and since the continent gave up on Russian energy supplies. The latter means that the gas reserves will decline faster than otherwise, adding a renewed pressure on gas and broader consumer prices. Such situation would limiting ECB’s rate cutting plans and throw a floor under the euro’s weakness. The next important target for the EURUSD recovery stands at 1.0672 – the minor 23.6% Fibonacci retracement on September to now selloff.

Elsewhere, the USDJPY benefited grandly from a broad-based dollar weakness to extend its retreat to 150 level. However, note that, released earlier this week, the Bank of Japan’s (BoJ) core CPI measures eased unexpectedly to 1.5%, a number that doesn’t necessarily back the BoJ normalization bets. 

Global Macro and Markets

Global Markets: With the US closed for Thanksgiving yesterday, and many market participants likely extending the holiday to the weekend, there isn’t too much action in financial markets to talk about. No US Treasury prices obviously. But bond yields were down in Europe. 10Y German bund yields dropped 3.4bp to 2.124%, and French 10Y yields fell 7.3bp, taking the yield down to 2.943%. and just below equivalent yields on Greek bonds, after they had hit headlines earlier in the week by exceeding them. EURUSD was pretty flat all day yesterday and is currently sitting at 1.0560. There wasn’t too much going on in the G-10 FX space, though the JPY drifted up to near the 152 level before recovering and will be supported this morning by the hotter-than-forecast Tokyo CPI data (see more below). Other Asian FX was also fairly quiet, though the THB and IDR made small gains in the region of 0.4%. US equities were also off for the day, but European bourses managed to eke out some small gains and the Eurostoxx 50 was up about 0.5%

G7 Macro: This was obviously a quiet day with no US data to focus on. Germany’s preliminary harmonised CPI inflation for November was unchanged from October at 2.4%YoY. Still, other German national measures increased, and make it less likely that the ECB will deliver 50bp rate cuts in December. There is further Euro area inflation data out today, which will potentially shape this story further.

There were also some marginally less horrible confidence figures out for the Euro area – though these remain fairly dire.   

For the rest of the G-7, Canadian 3Q24 GDP may be the main release to watch out for. The market consensus is for an annualised growth rate of just 1.1% QoQ, down from 2.1% in 2Q24.

Japan: Tokyo CPI should be the highlight of the day and the most watched data of today's data dump. Tokyo consumer price inflation jumped more than expected to 2.6% YoY in November (vs 1.8% in October, 2.2% market consensus) mainly due to a surge in fresh food prices (10.6%). Utilities also rose 6.5% as the temporary summer subsidy program ended. Core inflation (excluding fresh food) also rose more modestly to 2.2% YoY from 1.8% in October, though it was still higher than the market consensus of 2.0%. Core-core inflation (excluding fresh food and energy) also edged up to 1.9% (vs 1.8% in October) in line with the market consensus. On a monthly basis, inflation rose by 0.5% MoM, with goods and services up by 0.8% and 0.2% respectively.

Looking ahead, energy bills will create monthly volatility in inflation. The summer subsidy program ended in October, but new PM Ishiba has decided to reintroduce another support measure from January.  Consequently, we will continue to focus on the two core indices more closely than the headline numbers.

Japan’s industrial production rose 3.0% MoM sa in October, accelerating from the 1.6% rise in September. However, it didn’t meet the market consensus of a 4.0% rise. Technical paybacks from earlier car production disruptions and the waning impact of weather-related effects appear to have boosted overall production. This means that GDP recovery is likely to continue in the 4th quarter. However, the outlook survey suggested that output declined in November and December, so the coming months’ data will be important to watch.

Retail sales rebounded 0.1% (vs -2.2% in September). Most items experienced a decline in sales, but this was more than offset by a large gain in motor vehicle sales. These rose 11.8%. We believe that this is related to the earlier production disruption and do not expect this gain will be sustained in the coming months.

In a separate report, labour market conditions were shown to be relatively healthy. The jobless rate edged up to 2.5% in October (vs 2.4% in September, 2.5% market consensus) but the job-to-application ratio also ticked up to 1.25, recording a second monthly rise.

We note that the acceleration in inflation, combined with the solid recovery in monthly activity, increases the odds of another BoJ rate hike in December.

South Korea: Production, sales, and investment declined in October. Weak monthly activity data in October signals that the expected 4Q24 GDP rebound may be weaker than previously expected. All industry production (IP) fell -0.3% - falling for a second month. Manufacturing & mining output stayed flat; a bit better than the previous month but missed the market consensus. Semiconductor output rose 8.4% while car output declined 6.3%. For services, output rose 0.3% on the back of a strong gain in financial services (3.1%). However, more the important gauge for consumption, whole/retail sales declined -1.4%. 

For consumption, retail sales declined 0.4% in October with durable goods (-5.8%) sales down. For investment, both equipment investment (-5.8%) and construction (-4%) declined.

A weak start to the quarter tends to weigh more heavily on quarterly results. Consequently, today’s weaker-than-expected IP suggests a cloudy outlook for 4Q24 GDP. We will get to see the 4Q24 GDP outcome next January. This is likely to prompt another rate cut by the BoK in February.

India: India's GDP growth for the third quarter will likely decelerate slightly to 6.6% YoY from 6.7% in the previous quarter, largely driven by weather disruptions impacting agriculture output.