Divergence in central bank policies drives the yen rebound, hitting recent exchange rate highs

Yen Exchange Rate Gains Momentum Amid Policy Expectation Shifts

On Monday’s Asian market trading, the yen showed strong performance against the US dollar, reaching a near ten-day high. The rally is mainly driven by a clear divergence in policy stances between the Bank of Japan and the Federal Reserve. BOJ Governor Kazuo Ueda reiterated his stance on interest rate hikes, emphasizing that if inflation and economic performance follow expected trajectories, the central bank will continue to adjust policies. As a result, the sensitive 2-year Japanese government bond yield rose to 1% for the first time since June 2008, while the 20-year yield hit a new high since November 2020.

Meanwhile, the Federal Reserve has signaled a dovish tone. Several Fed officials have recently indicated the possibility of another rate cut in December, pushing the dollar index to its lowest in nearly two weeks. Consequently, USD/JPY declined to the 155.50-155.45 range. This misalignment in central bank policy expectations provides strong upward support for the yen.

Interaction Between Yen’s Safe-Haven Attribute and Risk Sentiment

Since the market opened this week, cautious sentiment has provided additional support for the yen. Weakening stock markets have prompted investors to shift toward safe-haven assets, benefiting the yen as a traditional safe-haven currency. This positive correlation between risk sentiment and the Japanese yen has become particularly evident amid recent market volatility.

Data from Japan’s Ministry of Finance shows that capital expenditure in Q3 increased by 2.9% quarter-on-quarter. Although the growth slowed from 7.6% in the previous quarter, it still reflects ongoing economic activity. Additionally, the November composite Purchasing Managers’ Index (PMI) final reading was 52.0, slightly up from 51.5 in October. Despite factory activity contracting for five consecutive months, steady growth in the services sector continues to support overall moderate expansion in the private sector.

On the government level, Prime Minister Sanae Suga reiterated the commitment to prudent fiscal management and closely monitoring interest rate trends, further stabilizing market expectations for the yen’s outlook.

Key Data This Week Will Influence USD Direction

Market focus is currently on upcoming US ISM Manufacturing PMI data releases, which will be a key driver at the start of the new month during North American trading hours. The performance of key US economic indicators will directly impact the further evolution of USD/JPY. If economic data underperform, it could reinforce market expectations of Fed rate cuts, continuing to depress the dollar and support the yen.

Technical Outlook: Key Support Levels and Rebound Challenges

From a technical perspective, USD/JPY bears are waiting for further confirmation of a breakout below the 155.40-155.35 zone. This area corresponds to the 100-period simple moving average on the 4-hour chart, and the technical oscillator on the 4-hour timeframe has turned negative, although daily indicators remain positive. This suggests bearish momentum is forming; if support is broken, the 155.00 psychological level will become the next key support. Further selling could solidify this cyclical downtrend.

On the upside, the 156.00 level will serve as the first resistance for a rebound. If bulls manage to break through this level, a short-term technical correction toward 156.65-156.70 could occur. Breaking above that could trigger a recovery toward 157.00, with momentum potentially extending to the 157.45-157.50 zone, approaching the November multi-month high near 158.00.