Japanese Yen Pared Back and Nikkei Advances after BoJ Keeps Rates on Hold

BoJ, Yen, Nikkei News and Analysis

• BoJ maintains negative interest rates, focus on wage-price cycle
• Conditions for BoJ policy pivot in 2024: persistent inflation and wage growth
• USD/JPY receives modest bid while the Nikkei posts sizable rise

BoJ Maintains Negative Interest rates, Focus on Wage-Price Cycle

The Bank of Japan (BoJ) voted to keep short term rates at -0.1% and left the yield curve control unchanged. After a Bloomberg report on the 11th of December suggested the final BoJ meeting of 2023 was unlikely to see any movement on rates, the majority of the market eased expectations of a rate hike but clearly some still held out as the yen dropped moments after the announcement.

Governor Kazuo Ueda mentioned that there are still many uncertainties around the economy but that officials anticipated modest, above trend growth. The Japanese economy is likely to see an improvement from Q3’s 0.7% contraction (QoQ) as oil prices have come down notably in the final quarter of the year for the net importer of oil. Question marks remain for inflation and wage growth as the bank seeks compelling evidence that both are likely to rise consistently.

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Conditions for BoJ Policy Pivot in 2024: Inflation and Wages

The BoJ’s Ueda stressed not only the incoming data but will also consult companies regarding what has been referred to as the ‘wage-price virtuous cycle’. Ueda mentioned that underlying inflation will gradually increase through FY 2025 but increases will be modest due to lower energy prices. Most importantly, Ueda stressed that the bank is still not in a position to foresee sustainable, stable inflation with sufficient confidence.

As long as this remains the case, policy is unlikely to shift but that won’t stop markets from speculating, especially if wage negotiations result in the fastest pace of pay rises in decades. In January trade unions will put forward their demands with the negotiation process coming to an end in March, leaving the BoJ with plenty of information to possibly make a decision to abolish negative interest rates in Q2.

The 5-minute USD/JPY chart reveals the immediate rise followed by a volatile spike back down to levels witnessed ahead of the meeting with prices stabilizing around the intra-day high.

USD/JPY 5-Minute Chart

Source: TradingView, prepared by Richard Snow

USD/JPY Receives Modest Boost, Pullback in Focus

USD/JPY had witnessed a counter-trend drift in the lead up to the BoJ announcement which has continued in the moments after. The zone of support around 141.50 and the underside of the large ascending channel resulted in a rejection of a move lower – requiring some other catalyst to force a sustained move lower. Friday is a big day for the pair as we get Japanese inflation data and US PCE figures where the possibility of higher Japanese inflation could be coupled with lower US inflation to send the pair lower once again. However, we will have to see what the data reveals.

Traders looking for a medium-term bearish continuation will be looking for potential areas of resistance, bringing the pullback to an end. The 145 mark is the most imminent level followed by the 146.50 mark. As we head into Christmas and the notably lower volume that accompanies this period, selling rallies may be something to consider as markets appear to lack the necessary momentum to fight the prevailing trend for extended periods of time.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

Nikkei Buoyed by BoJ Decision to Stand Pat

The Nikkei responded well to the decision to leave rates unchanged and consider incoming data. The index remains near its yearly high of 33,770, a potential level of resistance is today’s move can find subsequent follow through.

Price action previously bounced off the 50 SMA, consolidated for a while and then rose this morning. Dynamic support appears at the 50-day SMA followed by 32,307.

Nikkei Daily Chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX