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Bearish on the yen across the board? calm! Hidden opportunity around the corner
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Market www.xmtraders.commentary]: Bearish on the Japanese Yen across the board? Calm down! There is an opportunity hidden around the corner." Hope this helps you! The original content is as follows:
In early trading during the Asia-Europe session on Thursday (January 22), the yen continued its steady decline against the US dollar during the day, hitting a low of more than a week, and the US dollar-yen exchange rate continued to approach the 159.00 mark.
Today’s depreciation of the yen is due to the market’s advance bet that the Bank of Japan will keep interest rates unchanged on Friday. At the same time, this depreciation of the yen is also intertwined with multiple factors such as changes in global risk appetite, concerns about Japan’s fiscal health, and uncertainty about the Bank of Japan’s policy. The Bank of Japan’s two-day monetary policy meeting, which will end on Friday, is becoming the core focus that affects the short-term direction of the exchange rate.
Global risk appetite is heating up, and the demand for safe-haven yen is weakening
The yen is under pressure this time, and the first thing to bear the brunt is the ebbing of safe-haven demand.
U.S. President Trump’s recent reversal of stance on the Greenland issue, coupled with his withdrawal of the threat to impose high tariffs on many European countries, and his announcement at the Davos Forum to reach consensus with NATO on the framework of a future cooperation agreement on Greenland, have significantly boosted global risk sentiment. The S&P 500 index has strengthened significantly, and the spillover effect has pushed Asian stock markets to rise collectively on Thursday. The allocation of traditional safe-haven assets has become less attractive, and the demand for the Japanese yen as a typical safe-haven currency has been directly weakened.
Domestic pressure: Fiscal concerns and bond market fluctuations have suppressed the valuation of the yen
At the same time, Japan’s domestic fiscal health risks and bond market fluctuations have further suppressed the valuation of the yen.
The current financial situation in Japan has fallen into a serious situation, and as the congressional election approaches on February 8, both the ruling and opposition parties have expressed support for suspending the 8% consumption tax on food for a period of two years in order to win over voters.
You must know that 1/4 of the original expenditure of the Japanese government has to be filled by issuing national bonds.Consumption tax is the main source of government tax revenue. This trend may further aggravate the market's concerns about Japan's fiscal sustainability and cause the yen to depreciate.
The Japanese bond market suffered a heavy blow on Wednesday, coupled with the lackluster response to the 20-year government bond auction that day, the negative sentiment was further amplified, pushing long-term government bond yields to climb to historical peaks.
Although the sharp rise in Japanese government bond yields should have been a support to curb the depreciation of the yen, this support has not been effectively displayed due to the hedging of fiscal stimulus expectations and the bond market sell-off. The good news is that Yu Nagata, head of global markets at Sumitomo Mitsui Financial Group, Hiron said in an interview that once the full position is www.xmtraders.completed, the group's Japanese government bond investment portfolio is expected to double the current 10.6 trillion yen (about 67 billion U.S. dollars), that is, Japan's bank consortium begins to buy Japanese bonds, which is good news for the yen.
Supporting factors: The central bank's hawkish expectations, tightening logic continues to strengthen
The Bank of Japan's hawkish policy expectations have provided certain support for the yen. The Bank of Japan had previously raised its benchmark interest rate to around 0.75% in December, setting a peak since 1995. At that time, the bank judged that the feasibility of achieving the 2% inflation target was continuing to improve.
However, the depreciation of the yen suggests that the market believes that the Bank of Japan will not raise interest rates in January. It is reported that some policymakers within the Bank of Japan believe that an interest rate increase may be started as early as April.
Governor Kazuo Ueda also made it clear that if the economic performance and price trends are in line with expectations, the central bank will choose the opportunity to continue raising interest rates. He also emphasized that based on the level of inflation, the current interest rates are still in a significantly low range.
The continued improvement in inflation data further consolidates the logical support for the Bank of Japan’s subsequent tightening policy.
The Bank of Japan’s December survey released on Tuesday showed that most Japanese households expect prices to continue to rise in the next few years; and data released last Friday showed that Japan’s inflation rate has been above the central bank’s 2% target level for four consecutive calendar years.
For resource-scarce Japan, the weakening of the yen will further increase expectations for upward inflation, and the continued rise in wages will also provide a reasonable basis for the Bank of Japan to tighten monetary policy.
In addition, the Japanese government has previously introduced an economic stimulus package worth 21.3 trillion yen (approximately US$135 billion), aiming to relieve the living burden caused by rising prices on households. This measure may also indirectly help stabilize inflation.
Exports improved slightly, providing a backdrop for the yen's rebound
Although Japan has experienced a trade deficit for the fifth consecutive year, the trade deficit for the whole year of 2025 will be 2.65 trillion yen (US$17 billion), a decrease of nearly 53% from the previous year, representing a significant improvement in terms of trade. However, the trade surplus in December was 105.7 billion yen ($669 million), a year-on-year decrease of 12%. U.S. tariff policy and tense diplomatic relations between China and Japan are the main influencing factors.
Improvements in terms of trade usually lead to an internal appreciation of the yen, which in turn leads to an internal appreciation of the yen.Will cause external appreciation.
Potential buffer: Expectations of policy intervention, limiting the space for depreciation
Potential intervention expectations on the policy front also limit the space for depreciation of the yen.
Japanese Finance Minister Satsuki Katayama hinted last week that he would not rule out the possibility of joint intervention with the United States in the currency market to deal with the recent depreciation of the yen. Although this statement did not trigger aggressive bets by yen bulls, it also made short sellers wary when the exchange rate approached the key mark, and the market had a strong wait-and-see sentiment.
Summary and technical analysis:
Taken together, the ebb in safe-haven demand and fiscal concerns pose depreciation pressure, while central bank intervention and improved data provide long-term support.
In the short term, the market is waiting for the Bank of Japan's interest rate decision. Due to the recent continued depreciation of the Japanese yen, if the central bank announces that it will keep interest rates unchanged, the exchange rate may be all negative. The US dollar against the yen will first rise and then fall, or even have a false breakthrough. If the Bank of Japan raises interest rates beyond expectations, the US dollar against the yen may fall sharply that day. That is, basically no matter what the central bank chooses, the US dollar against the yen will most likely start a correction.
Technical aspects show that the bullish trend of the US dollar against the yen remains intact. The exchange rate may instantly break through the upward channel based on the Bank of Japan's decision to suspend interest rate hikes. The current support is at the 5-day line, and the pressure level is at 159. The previous high is also the upper track of the upward channel line.
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