Japanese Yen strengthens on BoJ rate hike signals

The USD/JPY pair attracts some sellers to near 158.15 during the Asian trading hours on Thursday. The Japanese Yen (JPY) strengthens against the US Dollar (USD) following hints from Japanese policymakers that interest rates will rise later this month. The US August Nonfarm Payrolls (NFP) report will take center stage later on Friday.

The Bank of Japan (BoJ) governor Kazuo Ueda said on Tuesday that the central bank will debate raising interest rates, including in ‌September, with a focus on whether inflationary risks were heightening, hinting at a strong chance of a hike in September. Treasury Secretary Scott Bessent stated that he met Ueda and called for “decisive” monetary steps to combat the weak JPY.

Overnight index swaps are now more than fully pricing in a standard 25 basis points (bps) rate hike at the BoJs September meeting. Pricing suggests only a very low likelihood of a 50 bps move.

Traders await the US labor market data this week, including the highly anticipated NFP and Unemployment Rate. This report could offer some clues about the US interest rate path.

Economists expect the US economy to add 58,000 jobs in August, while the Unemployment Rate is projected to hold steady at 4.1% during the same period. If the report shows stronger-than-expected outcomes, this could underpin the USD against the JPY in the near term.

Strategists at Scotiabank note that recent BoJ commentary has subtly shifted market expectations around the pace and size of future tightening. They highlight that the remarks “hinted to the possibility of tightening in increments greater than the 25bpt adjustments typically delivered by central banks,” a move that would be “even less expected by the BoJ—given that its tightening out of negative rates and the zero lower bound have even favored 10-15bpt adjustments.” This evolving guidance underscores the potential for less conventional step sizes as Japan continues to normalize policy.

In the daily chart, USD/JPY keeps a bearish near-term bias as spot holds under the 100-day simple moving average (SMA) and the Bollinger Bands 20-period middle band. Price is only marginally above the lower Bollinger band at 157.98, indicating the pair is pressing the lower edge of the recent range, while the Relative Strength Index (14) around 38.9 suggests subdued momentum after exiting oversold conditions.

On the topside, initial resistance is located at the Bollinger 20-period middle band around 159.18, ahead of the 100-day SMA at 159.99 and the upper Bollinger band near 160.38, which together define a dense cap for any recovery attempts. On the downside, immediate support is provided by the lower Bollinger band at 157.98; a decisive break below this level would open the door to further weakness, whereas holding above it could see USD/JPY consolidating while remaining constrained beneath the 159.00–160.00 resistance cluster.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

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 Japans 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 BoJs 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 Yens value against other currencies seen as more risky to invest in.